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Do Credit Rating Agencies Add Value? Evidence from the Sovereign Rating Business Institutions

Author

Listed:
  • Eduardo Cavallo
  • Andrew Powell
  • Roberto Rigobon
Abstract
If rating agencies add no new information to markets, their actions are not a public policy concern. But as rating changes may be anticipated, testing whether ratings add value is not straightforward. This paper argues that ratings and spreads are both noisy signals of fundamentals and suggest ratings add value if, controlling for spreads, they help explain other variables. The paper additionally analyzes the different actions (ratings and outlooks) of the three leading agencies for sovereign debt, also considering the differing effects of more or less anticipated events. The results are consistent across a wide range of tests. Ratings do matter and hence how the market for ratings functions may be a public policy concern.

Suggested Citation

  • Eduardo Cavallo & Andrew Powell & Roberto Rigobon, 2008. "Do Credit Rating Agencies Add Value? Evidence from the Sovereign Rating Business Institutions," Research Department Publications 4601, Inter-American Development Bank, Research Department.
    • Handle: RePEc:idb:wpaper:4601
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    References listed on IDEAS

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    7. António Afonso & Pedro Gomes & Philipp Rother, 2006. "What “Hides” Behind Sovereign Debt Ratings?," Working Papers Department of Economics 2006/35, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    8. Barry Eichengreen & Ashoka Mody, 2000. "What Explains Changing Spreads on Emerging Market Debt?," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 107-134, National Bureau of Economic Research, Inc.
    9. Dell'Ariccia, Giovanni & Schnabel, Isabel & Zettelmeyer, Jeromin, 2006. "How Do Official Bailouts Affect the Risk of Investing in Emerging Markets?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1689-1714, October.
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    Cited by:

    1. Davor Kunovac & Rafael Ravnik, 2017. "Are Sovereign Credit Ratings Overrated?," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 59(2), pages 210-242, June.
    2. Jens Hilscher & Yves Nosbusch, 2010. "Determinants of Sovereign Risk: Macroeconomic Fundamentals and the Pricing of Sovereign Debt," Review of Finance, European Finance Association, vol. 14(2), pages 235-262.
    3. Zoran Ivanovic & Sinisa Bogdan & Suzana Baresa, 2015. "Modeling and Estimating Shadow Sovereign Ratings," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 9(3), September.
    4. Alsakka, Rasha & ap Gwilym, Owain, 2013. "Rating agencies’ signals during the European sovereign debt crisis: Market impact and spillovers," Journal of Economic Behavior & Organization, Elsevier, vol. 85(C), pages 144-162.
    5. Juan J. Cruces & Christoph Trebesch, 2013. "Sovereign Defaults: The Price of Haircuts," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 85-117, July.
    6. Johannes W. Fedderke, 2013. "Promotion and Relegation between Country Risk Classes as Maintained by Country Risk Rating Agencies," Working Papers 376, Economic Research Southern Africa.
    7. William Perraudin & Andrew Powell & Peng Yang, 2016. "Multilateral Development Bank Ratings and Preferred Creditor Status," IDB Publications (Working Papers) 94656, Inter-American Development Bank.
    8. Hassan, Gazi & Wu, Eliza, 2012. "Sovereign country rating, growth volatility and financial crisis," MPRA Paper 40085, University Library of Munich, Germany.
    9. Velloso, Helvia & Bustillo, Inés & Perrotti, Daniel E., 2018. "Sovereign credit ratings in Latin America and the Caribbean: Trends and impact on debt spreads," Studies and Perspectives – ECLAC Office in Washington 44336, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    10. Nazim Belhocine & Mr. Salvatore Dell'Erba, 2013. "The Impact of Debt Sustainability and the Level of Debt on Emerging Markets Spreads," IMF Working Papers 2013/093, International Monetary Fund.
    11. Papageorgiou, Theofanis & Michaelides, Panayotis G. & Tsionas, Efthymios G., 2016. "Business cycle determinants and fiscal policy: A Panel ARDL approach for EMU," The Journal of Economic Asymmetries, Elsevier, vol. 13(C), pages 57-68.
    12. Perraudin, William & Powell, Andrew & Yang, Peng, 2016. "Multilateral Development Bank Ratings and Preferred Creditor Status," IDB Publications (Working Papers) 7686, Inter-American Development Bank.

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    More about this item

    JEL classification:

    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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