The effectiveness of credit rating agency monitoring: Evidence from asset securitizations

Samuel Bonsall, Kevin Koharki, Monica I Neamtiu

Research output: Contribution to journalArticle

6 Citations (Scopus)

Abstract

This study investigates how differences between the rating agencies' initial (at the date of debt issuance) and subsequent (post-issuance) monitoring incentives affect securitizing banks' rating accuracy. We hypothesize that the agencies have stronger incentives to monitor issuers when providing initial versus post-issuance ratings. We document that initial ratings are positively associated with off-balance sheet securitized assets and incrementally associated with on-balance sheet retained securities. However, subsequent ratings fail to capture current exposure to off-balance sheet securitizations. We also find that subsequent ratings reflect default risk less accurately than initial ratings. The subsequent ratings' responsiveness to default risk is worse when a bank has more off-balance sheet securitized assets. Collectively, our findings are consistent with lax post-issuance monitoring. They raise questions about the effectiveness of using ratings as an ongoing contracting mechanism and suggest that conclusions about rating accuracy could differ depending on whether researchers focus on initial versus post-issuance ratings.

Original languageEnglish (US)
Pages (from-to)1779-1810
Number of pages32
JournalAccounting Review
Volume90
Issue number5
DOIs
StatePublished - Sep 1 2015

Fingerprint

Monitoring
Securitization
Rating
Credit rating agencies
Assets
Balance sheet
Default risk
Incentives
Rating agencies
Contracting
Responsiveness
Debt

Keywords

  • Asset securitizations
  • Credit rating agencies
  • Credit rating agency monitoring
  • Off-balance sheet credit risk

ASJC Scopus subject areas

  • Finance
  • Accounting
  • Economics and Econometrics

Cite this

The effectiveness of credit rating agency monitoring : Evidence from asset securitizations. / Bonsall, Samuel; Koharki, Kevin; Neamtiu, Monica I.

In: Accounting Review, Vol. 90, No. 5, 01.09.2015, p. 1779-1810.

Research output: Contribution to journalArticle

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