Topic:Do Credit Rating Agencies Respond to Investors’ Demand?
Speaker:Xiao Xiao，Guanghua School of Management
Time:Friday, April 19th, 10:00-11:30 a.m
Place:Room 217, Guanghua Building 2
Prior studies have provided evidence that outside pressure can affect how credit rating agencies (CRAs) assign ratings. In this paper, we examine the impact of a previously unexplored type of pressure on CRAs’ ratings: investors’ demand. Exploiting the exogenous and sharp increase in investors’ demand for corporate bonds rated A- in 2013 caused by the Federal Reserve’s asset purchase program, we find that S&P upgraded abnormally more BBB+ firms to the A- category in response to investors’ demand. To validate our conclusion, we exclude several alternative explanations. The abnormal upgrade was not observed among firms with ratings adjacent to BBB+, and was not offset by the downgrade in the same and subsequent periods. S&P’s disclosure of new rating criteria in 2013 cannot rule out the abnormality of the upgrade. In addition, the abnormal upgrade can neither be justified by changes in the upgraded firms’ financial performance or ability to pay off debt. Further tests show that the market considered the upgraded BBB+ bonds as riskier than other A- bonds and priced the upgraded BBB+ bonds similarly with other BBB+ bonds.
Dr. Xiao Xiao is an assistant professor of Accounting at Guanghua School of Management, Peking University.
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