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Can Credit Rating Agencies See Through Transitory Shocks to Credit Risk ?
| Content Provider | Semantic Scholar |
|---|---|
| Author | Gredil, Oleg R. Kapadia, Nishad Lee, Jung-Hoon |
| Copyright Year | 2017 |
| Abstract | Credit Rating Agencies (CRAs) assert that ratings are useful because, by responding only to permanent changes in credit risk, they are more stable than market-based measures. Stability is valuable since rating changes have real consequences for private contracts and access to capital. We test whether CRAs can actually distinguish between permanent and transitory shocks to credit risk in real-time. We use mutual fund equity fire-sales as a transitory shock to credit risk, because declines in stock prices increase leverage and signal lower cash flows. We find that CRAs are significantly less likely to downgrade fire-sale firms relative to matched controls that experience permanent shocks. In contrast, Credit Default Swap spreads increase similarly for both treated and control firms. These results suggest that replacing ratings with market-based estimates of credit risk may result in stronger real effects from transitory price shocks. |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | http://cefup.fep.up.pt/uploads/fin%20seminars/2017/Paper_Oleg%20Gredil_22.11.2017.pdf |
| Language | English |
| Access Restriction | Open |
| Content Type | Text |
| Resource Type | Article |
