Are watch procedures a critical informational event in the credit ratings process? An empirical investigation

Are watch procedures a critical informational event in the credit ratings process? An empirical investigation

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Article ID: iaor201112349
Volume: 34
Issue: 4
Start Page Number: 617
End Page Number: 640
Publication Date: Dec 2011
Journal: Journal of Financial Research
Authors: , , ,
Keywords: credit evaluation
Abstract:

The Boot, Milbourn, and Schmeits (2006) model (Boot model) predicts certain credit rating events are likely to be more informative than others and that credit watch procedures are an important driver of such differences. We test the core empirical predictions of their model. Our sample comprises U.S. corporate issuer credit ratings provided by Moody's, 1990–2006. Our findings fail to uncover compelling evidence for the empirical predictions of the Boot model in relation to the role of watch procedures as coordinating mechanisms. Rather, our findings are more supportive of the view that rating agencies are always at an informational advantage relative to investors.

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