Do Rating Agencies Cater? – Evidence from Rating-Based Contracts


Journal of Accounting and Economics

avril-mai 2015, vol. 59, n°2-3, pp.264-283

Départements : Comptabilité et Contrôle de Gestion

Mots clés : Rating agencyOff-balance-sheet financeSoft informationDebt contracting

I examine whether rating agencies cater to borrowers with rating-based performance-priced loan contracts (PPrating firms). I use data from Moody׳s Financial Metrics on its quantitative adjustments for off-balance-sheet debt and qualitative adjustments for soft factors. In the cross-section and for borrowers experiencing adverse economic shocks, I find that these adjustments are more favorable for PPrating firms than for other firms, consistent with rating agencies catering to the PPrating borrowers. I find that this catering is muted in two circumstances when rating agencies׳ reputational costs are higher than usual: (1) near the investment grade and prime short-term rating thresholds and (2) when Fitch Ratings also provides a rating