Structural Shifts in Credit Rating Standards



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    • Aysun Alp is at Sabanci School of Management, Sabanci University, Istanbul, Turkey. I am indebted to an anonymous referee, Cam Harvey (the Editor), and an Associate Editor for detailed comments that greatly improved the paper. I am also grateful to Nagpurnanand R. Prabhala, Haluk Unal, Albert S. “Pete” Kyle, Michael Faulkender, Gerard Hoberg, Mark Loewenstein, Dalida Kadyrzhanova, and the seminar participants at Maryland, Sabanci, Koc, and Rowan Universities for valuable comments and suggestions. All errors are my own.


I examine the time-series variation in corporate credit rating standards from 1985 to 2007. A divergent pattern exists between investment-grade and speculative-grade rating standards from 1985 to 2002 as investment-grade standards tighten and speculative-grade loosen. In 2002, a structural shift occurs toward more stringent ratings. Holding characteristics constant, firms experience a drop of 1.5 notches in ratings due to tightened standards from 2002 to 2007. Credit spread tests suggest that the variation in standards is not completely due to changes in the economic climate. Rating standards affect credit spreads. Loose ratings are associated with higher default rates.