Are Unsolicited Credit Ratings Lower? International Evidence From Bank Ratings

Authors

  • Winnie P. H. Poon,

  • Michael Firth

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      The authors would like to thank the financial analysts at Fitch Ratings, Ltd. for providing information on their rating methodology, and Bankscope for providing detailed bank reports. The authors also thank Benton Gup, Junsoo Lee, Patrick Van Roy, Peter Pope (the editor), and the anonymous referee for constructive comments and suggestions. The authors gratefully acknowledge a research grant from the Research and Postgraduate Studies Committee of Lingnan University, Hong Kong. Any errors are the authors’ own.


Michael Firth, School of Accounting and Finance, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong.
e-mail: afmaf@inet.polyu.edu.hk

Abstract

Abstract:  In recent years credit rating agencies have started rating firms who have not asked for a rating. Recipients of unsolicited ratings argue that the assigned ratings are too low and reflect a lack of comprehensive knowledge of the rated firms. We set out to examine these claims using a comprehensive and international sample of 1,060 bank ratings. Our results show that there is a significant difference in the distributions of ratings, and the shadow group has lower ratings. The results also indicate that banks that received shadow ratings are smaller and have weaker financial profiles than banks that have other ratings. This explains, in part, the lower ratings. In addition, we develop a model to explain bank ratings. The two-step treatment effects model shows that bank size, profitability, asset quality, liquidity, and sovereign credit risk are important factors in determining bank ratings.

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