This paper shows that the stock price of the rating agency Moody’s reacts negatively to ratingactions that are perceived to indicate low rating quality. The reaction is economicallysignificant. The cumulative effect corresponds to a 20% loss in market capitalization. Thissuggests that market...

Rating agencies state that they take a rating action only when it is unlikely to bereversed shortly afterwards. Using a formal representation of the rating process, I showthat such a policy provides a good explanation for the empirical evidence: ratingchanges relatively seldom occur, they...

Using a structural model of default, I derive rating characteristics if ratings are meant tolook ‘through the cycle’ as opposed to being based on the borrowers’ current condition.The through-the-cycle method, which is employed by most rating agencies, requires aseparation of permanent and...

We use dynamic panel analysis to examine whether credit rating agencies achieve what they claim to achieve, namely, look into the future when assigning their ratings. We find that Moodey's ratings help predict individual financial ratios over a horizon of up to five years. Ratings also predict a...

Rating agencies state that they take a rating action only when it is unlikely to bereversed shortly afterwards. Based on a formal representation of the rating process, Ishow that such a policy provides a good explanation for the empirical evidence: Ratingchanges occur relatively seldom, exhibit...

We use dynamic panel analysis to examine whether credit rating agencies achieve what they claim to achieve, namely, look into the future when assigning their ratings. We find that Moody's ratings help predict individual financial ratios over a horizon of up to five years. Ratings also predict a...