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Publications
  • 2021
  • Working Paper
  • HBS Working Paper Series

International Evidence on the Effects of a Local Presence by U.S. Credit Rating Agencies

By: Liran Eliner, Michael Machokoto and Anywhere Sikochi
  • Format:Print
  • | Language:English
  • | Pages:50
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Abstract

Major U.S. credit rating agencies are criticized for failing to understand developments in other economies and thereby impeding capital access by assigning lower ratings. Consistent with this, we find that Moody's and S&P credit ratings are more favorable after the agencies establish a local presence in the rated issuer's country of domicile. The results appear to be driven by a decrease in negative adjustments applied to model-predicted ratings, indicating that rating analysts become more confident with their quantitative model outputs after a local presence. Positive adjustments also increase, suggesting that analysts become more willing to assign higher than model-predicted ratings. Subsequent evidence suggests that, after the local presence, rating increases are not merely catering to local economies but become more informative as evidenced by their negative association with future credit risk premium and probability of default. Our findings inform the debate on the regulation of credit rating agency markets around the world.

Keywords

Credit Rating Agencies; Credit Ratings; Rating Adjustments; Rating Disagreement; Geographic Proximity; Soft Information; Credit; Geographic Location; Local Range

Citation

Eliner, Liran, Michael Machokoto, and Anywhere Sikochi. "International Evidence on the Effects of a Local Presence by U.S. Credit Rating Agencies." Harvard Business School Working Paper, No. 20-083, February 2020. (Revised August 2021.)
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More from the Authors
  • Launch Africa Ventures By: Anywhere Sikochi, Adam Sulkowski and Francesco Tronci
  • Public Sector SME Grading System in Emerging Markets: A Focus on Nigeria By: Saveshen Pillay, Anywhere Sikochi, Charles Odii, Zaakirah Ismail, Regina Bamaiyi and Denise Mubaiwa
  • The Credit Rating Agency Market in Africa: Landscape and Future Research Directions By: Saveshen Pillay and Anywhere Sikochi
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