“Noise” in Ratings: Not Entirely Random I investigate the informational accuracy as opposed to informational content of credit ratings over time. The study presents an empirical analysis of the classification errors. Results suggest that greater the credit risk in the economy, the higher is the error rate. Of all binary classifications tested, classification error for dichotomous class of inves...

The development of Sukuk market as the alternative to the existing conventional bond market has risen the issue of rating the Sukuk issuance. These credit ratings fulfil a key function of information transmission in capital market. Moreover, Basel Committee for Banking Supervision has now instituted capital charges for credit risk based on credit ratings. Basel II framework allowed the bank to ...

This paper investigates whether and how property dispositions affect credit ratings of real estate investment trusts (REITs). We use an instrument variable to control the potential endogeneity problem associated with firm’s decision to divest assets and find that property dispositions have a positive effect on REIT corporate credit ratings. We further investigate the underlying channels for thi...

Rating agencies are often criticized for being biased in favor of borrowers, for being too slow to downgrade following credit quality deterioration, and for being oligopolists. Based on a model that takes into account the feedback effects of credit ratings, I show that: (i) rating agencies should focus not only on the accuracy of their ratings but also on the effects of their ratings on the pro...

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 ...