Abstract
This paper analyzes the extent to which selection explains the observed discrepancy between solicited and unsolicited ratings. I propose a model of selection with truth telling rating agencies and borrowers with the ability to veto the revelation of the rating. The observed difference between the two categories of ratings in different sectors is in line with the prediction of the model. In the sovereign market there is a positive selection of borrowers into unsolicited ratings whereas other sectors have, on the contrary, lower unsolicited rating grades than those solicited.
Highlights
Credit rating agencies (CRAs) arenancial intermediaries that give opinions on the creditworthiness of borrowers
The model integrates two elements of the ratings business that have not previously been studied jointly ÀÀÀ unsolicited ratings and condential ratings ÀÀÀ and illustrates how the selection of borrowers into di®erent solicitation groups may generate positive or negative average rating grade di®erences and di®erences in ex-post default rates without any strategic behavior from the rating agencies
If we focus on the evolution of the average ratings over time, as in Fig. 2, the pattern across di®erent sectors is again very unequal
Summary
Credit rating agencies (CRAs) arenancial intermediaries that give opinions on the creditworthiness of borrowers. In a sample of Asian banks rated by Fitch in 2004, Van Roy (2013) ̄nds further evidence that unsolicited bank ratings are lower than solicited ones and concludes that there is no support for selection bias This evidence is compatible with two explanations: strategic behavior on the part of the CRA and selection of borrowers into di®erent solicitation categories. The model integrates two elements of the ratings business that have not previously been studied jointly ÀÀÀ unsolicited ratings and condential ratings ÀÀÀ and illustrates how the selection of borrowers into di®erent solicitation groups may generate positive or negative average rating grade di®erences and di®erences in ex-post default rates without any strategic behavior from the rating agencies
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