SHOULD ALL TAX-EXEMPT BORROWERS WITH INVESTMENT-GRADE QUALITY ACQUIRE CREDIT RATINGS?

Credit ratings help reveal and certify borrowers' quality in a market with information asymmetry. Examination is offered of the quality revelation and certification values of a bond rating in the tax-exempt bond market in which a high percentage of new issues are not rated. It is shown that lar...

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Bibliographic Details
Published in:Journal of business finance & accounting 1993-01, Vol.20 (2), p.291-306
Main Authors: HSUEH, L. PAUL, LIU, Y. ANGELA
Format: Article
Language:English
Subjects:
Bond issues
Bond markets
Bond ratings
Bonds
Credit
Credit ratings
Statistical analysis
Stock exchange
Studies
Tax exempt organizations
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Summary:Credit ratings help reveal and certify borrowers' quality in a market with information asymmetry. Examination is offered of the quality revelation and certification values of a bond rating in the tax-exempt bond market in which a high percentage of new issues are not rated. It is shown that larger borrowers whose bond issues are targeted at national markets benefit more from acquiring a bond rating than smaller/local borrowers. The findings not only provide a plausible explanation why investment-grade quality borrowers may choose not to acquire a credit rating, but also are consistent with the observation that most nonrated tax-exempt bonds are relatively small in issue size.
ISSN:0306-686X
1468-5957
DOI:10.1111/j.1468-5957.1993.tb00666.x