When do differences in credit rating methodologies matter? evidence from high information uncertainty borrowers

Samuel B. Bonsall, Kevin Koharki, Monica Neamtiu

Research output: Contribution to journalArticle

7 Scopus citations

Abstract

This study investigates whether and when differences in the credit rating agencies' methodologies result in differences in rating properties. In particular, this study focuses on differences in information processing constraints between a rating agency that utilizes qualitative analysis and direct access to borrowers' management in its rating process (Standard &Poor's) compared to one that does not (Egan Jones Ratings Company) and how these differences affect rating quality. We find that as information uncertainty about borrowers increases, Egan Jones's rating accuracy, informativeness, and timeliness decrease relative to Standard &Poor's. Our findings suggest that Egan Jones's more restricted rating methodology can lead to limitations in information processing and, thus, reductions in Egan Jones's rating quality advantage for borrowers with greater information uncertainty.

Original languageEnglish (US)
Pages (from-to)53-79
Number of pages27
JournalAccounting Review
Volume92
Issue number4
DOIs
StatePublished - Jul 2017

Keywords

  • Credit rating agencies
  • Information uncertainty
  • Qualitative versus quantitative analysis

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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