When Do Differences in Credit Rating Methodologies Matter? Evidence from High Information Uncertainty Borrowers

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 dir...

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Bibliographic Details
Published in:The Accounting review 2017-07, Vol.92 (4), p.53-79
Main Authors: Bonsall, Samuel B., Koharki, Kevin, Neamtiu, Monica
Format: Article
Language:English
Subjects:
Credit ratings
Differences
Information processing
Methods
Qualitative research
Rating services
Research methodology
Uncertainty
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Summary: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.
ISSN:0001-4826
1558-7967
DOI:10.2308/accr-51641