Asymmetric trading responses to credit rating announcements from issuer- versus investor-paid rating agencies

Loading...
Thumbnail Image
Date
2024-01
Open Access Location
Journal Title
Journal ISSN
Volume Title
Publisher
John Wiley and Sons, Ltd
Rights
(c) 2023 The Author/s
CC BY 4.0
Abstract
The credit rating industry has traditionally followed the “issuer-pays” principle. Issuer-paid credit rating agencies (CRAs) have faced criticism regarding their untimely release of negative rating adjustments, which is attributed to a conflict of interests in their business model. An alternative model based on the “investor-pays” principle is arguably less subject to the conflict of interest problem. We examine how investors respond to changes in credit ratings issued by these two types of CRAs. We find that investors react asymmetrically: They abnormally sell equity stakes around rating downgrades by investor-paid CRAs, while abnormally buying around rating upgrades by issuer-paid CRAs. Our study suggests that, through their trades, investors capitalize on value-relevant information provided by both types of CRAs, and a dynamic trading strategy taking advantage of this information generates significant abnormal returns.
Description
Keywords
credit ratings, institutional investors, trading strategy
Citation
Nguyen QMP, Do HX, Molchanov A, Nguyen L, Nguyen NH. (2024). Asymmetric trading responses to credit rating announcements from issuer- versus investor-paid rating agencies. Journal of Business Finance and Accounting. 51. 1-2. (pp. 84-112).
Collections