Why do potentially inflated credit ratings affect rational, well-informed creditors’ bond investment decisions? What are credit ratings’ effects on firms’ behavior? We resolve these questions by modeling a credit rating agency (CRA) as a certified expert who transmits information to creditors with coordination incentives and dispersed beliefs. In the unique equilibrium, high credit ratings are ...

This study uses tailor made enterprise level data from various sources for firms from manufacturing industries to test for the link between credit constraints, measured by a credit rating score provided by a leading credit rating agency, and imports in Germany for the first time. We find empirical evidence that a better credit rating score is positively related to extensive margins of import – ...

Using a large data set on credit default swaps, we study how default risk interacts with interest-rate risk and liquidity risk to jointly determine the term structure of credit spreads. We classify the reference companies into two broad industry sectors, two broad credit rating classes, and two liquidity groups. We develop a class of dynamic term structure models that include (i) two benchmark ...

Both auditors and credit rating agencies have been linked to financial scandals in recent history. In the early 2000’s, several of the “big five” accounting firms issued favorable audit opinions to public companies employing deceptive accounting practices. Some of these companies even committed outright fraud. Once the investing public caught wind of these accounting irregularities, it lost tru...

This paper develops and implements a multi-factor, Markov chain model for bond rating migrations and credit spreads. The building blocks are historical transition matrixes and a set of latent credit cycle variables. The model’s central feature is for transition matrixes to be time-varying, and driven by rating-specific latent variables which encompass such economic factors as the business cycle...

Informational Efficiency of Credit Default Swap and Stock Markets: The Impact of Credit Rating Announcements This Paper analyses the response of stock and credit default swap (CDS) markets to rating announcements by the three major rating agencies during 2000-2. Applying event study methodology, we examine whether and how strongly these markets respond to rating announcements in terms of abnorm...