Rating Agency Reputation, the Global Financial Crisis, and the Cost of Debt


  • Seung Hun Han,

  • Michael S. Pagano,

  • Yoon S. Shin

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    • Seung Hun Han is an Assistant Professor of Finance at KAIST in Daejeon, Korea. Michael S. Pagano is the Robert J. and Mary Ellen Darretta Endowed Chair in Finance at Villanova University in Villanova, PA. Yoon S. Shin is an Assistant Professor of Finance at Loyola University Maryland in Baltimore, MD.

  • We are especially thankful to the Bill Christie (Editor), an anonymous referee, Bruce Lehmann, Jean Helwege, Chester Spatt, and other participants at the 2010 Credit Ratings Workshop of the NBER, the 2010 Financial Management Association meeting, and the 2011 Asian Meeting of the Econometric Society for their helpful comments and suggestions. We gratefully acknowledge financial support from the 2009 Sellinger Summer Research Grant at Loyola University Maryland, Daejoen City and the Graduate School of Innovation and Technology Management at the Korea Advanced Institute of Science and Technology (KAIST).


Why do foreign firms obtain credit ratings by global rating agencies rather than from their home country's rating agencies even though global raters typically assign lower credit ratings when these foreign firms issue bonds in their home currencies? We find that bonds rated by a global agency decreased yields 11-14 basis points (bps) when compared to those rated by Japanese rating agencies but, during the 2007-2009 financial crisis, the yields on these Japanese bonds increased 12-17 bps, thus fully negating the advantage of obtaining a bond rating from a global rater. This suggests that the reputation of global rating agencies declined during the 2007-2009 crisis period.