Optimistic Ratings Research Articles

Creditor protection and credit ratings in the US RMBS market

AbstractMore than a dozen years after the Dodd‐Frank Act was introduced, we investigate whether credit ratings for the US residential mortgage‐backed securities (RMBS) market differ given the different levels of creditor protection across the US states. Our paper provides three results. First, for the period 2017–2020, we provide evidence that there is inconsistency between credit rating agencies (CRAs): only for Dominion Bond Rating Service Morningstar (DBRS) and Moody's, we observe that the credit ratings for securitization tranches differ given different creditor protection levels across states. Second, in states with higher creditor protection, the relatively new CRAs, DBRS and Kroll Bond Rating Agency (KBRA), are more likely to provide more optimistic ratings than CRAs historically present in the rating market (Moody's, S&P, and Fitch). Third, issuers appear to issue larger deals in US states that are more creditor friendly.

Do Analysts’ Social Ties Affect the Textual Information in Their Reports? Evidence from China

ABSTRACT We develop insights into how analysts’ social ties affect their objectivity and the information content of reports, based on quantitative measures of social ties and textual information content. Using a sample ranges from January 2006 to December 2016 in China, we show that with wide social ties to fund managers, analysts’ ability to burnish their reputation with informative reports and to achieve career success with optimistic stock ratings is enhanced. Further evidence indicates that the trade-off between reputation and career success is dynamic. Specifically, after being elected as New Fortune stars, analysts attach more importance on textual information and are less subjective on stock ratings. These findings are robust across various robustness tests. Overall, our evidence highlights the role of social ties in the information-dissemination process in China A-share stock markets from the perspective of analysts and fund managers.

The Incentives of Crypto Experts in Initial Coin Offerings

The initial coin offering (ICO) market relies on the “wisdom of crowds”, ratings given by the collective opinion of crypto experts, to overcome asymmetric information problems in the fundraising process. We investigate the biases of crypto experts in providing ratings in ICOs. We conjecture that experts are incentivized to provide optimistic ratings to promote ICO fundraising success due to their future opportunities as advisors in subsequent ICOs. We examine our conjectures using ICO ratings on ICOBench.com during the period of 2016 to 2019. Consistent with our conjectures, we find that expert ratings in ICOs exhibit systematic optimism relative to the algorithm-generated objective ratings, and experts who give optimistic ratings to a greater number of fundraising successful ICOs are more likely to be hired as advisors in subsequent ICOs. Further, we find that ICOs with more optimistic expert ratings and ICOs hiring experts as advisors are associated with greater likelihood of fundraising success but not that of exchange listing and one-year survival. We interpret our findings to suggest that the incentive of crypto experts to be hired as ICO advisors and the associated optimism in their ratings help ICO startups raise funds but do not help crypto investors in achieving competitive outcome.

Unexpected Bond Ratings and the Cost of Municipal Debt

We investigate whether credit rating agencies (CRAs) and investors price the extent to which municipal bond ratings are explainable using public information. We use an ordinal logistic regression to estimate the expected and unexpected portions of bond ratings, and find that both CRA fees and yield premiums are higher for negative unexplained (i.e., pessimistic) ratings. CRA fees are not generally associated with positive unexplained (i.e., optimistic) ratings, although we document a positive association when financial reporting quality or investor sophistication is low. While creditors price both pessimistic and optimistic unexplained ratings, yield premiums for pessimistic ratings are significantly greater than yield discounts for optimistic ratings. These findings manifest after the passage of the Dodd-Frank Act, among sophisticated investors, and among municipalities with high financial reporting quality. We contribute to research that examines the determinants of municipal debt costs, CRA fees, and the information content of bond ratings.

Reputations and credit ratings: Evidence from commercial mortgage-backed securities

How do changes in a rating agency's reputation affect the ratings market? We study the dynamics of credit ratings after Standard & Poor's (S&P) was shut out of a large segment of the commercial mortgage-backed securities (CMBS) ratings market following a procedural mistake. Exploiting the fact that most CMBS have ratings from multiple agencies, we show that S&P subsequently eased its standards compared to other raters. This coincided with a partial recovery in the number of deals S&P was hired to rate. Our findings suggest that an agency can regain market share after suffering reputational damage by issuing optimistic ratings.

Market Expectations and Default Risk Premium in Credit Default Swap Prices: A Case Study of Argentine Default

This article explores expectations of credit market and default risk premium implicit in credit default swap prices in the case of Argentine default. We find that default risk premium is substantial and its relation with default probability is not monotone. Default risk premium increases with a rising default probability when default probability is low, but it declines when default probability reaches a certain level and continues to rise. This result suggests that default risk premium plays a primary role in the pricing of credit derivatives when default risk is moderate, but its impact becomes secondary when default risk becomes extremely high. We also find default risk premium has a hump-shaped term structure with the peak of the curve around five to six years. Our results show that variation in default risk premium in Argentine sovereign debt was affected by changes in the U.S. business cycle and credit conditions and the overall strength of the Argentine economy. Comparing with market expected default probabilities, we find that major rating agencies assigned overly optimistic ratings to Argentine debt and they lagged the market in downgrading the debt.

The contagion of optimism: The relationship between patient optimism and palliative care clinician overestimation of survival among hospitalized patients with advanced cancer.

Clinicians frequently overestimate survival time among seriously ill patients, and this can result in medical treatment at end of life that does not reflect the patient's preferences. Little is known, however, about the sources of clinicians' optimistic bias in survival estimation. Related work in social networks and experimental psychology demonstrates that psychological states-such as optimism-can transfer from one person to another. We directly observed and audio recorded 189 initial inpatient palliative care consultations among hospitalized patients with advanced cancer. Patients self-reported their level of trait optimism and expectations for survival prognosis prior to the palliative care consultation, and the palliative care clinicians rated their expectations for the patient's survival time following the initial conversation with the patient. We followed patient mortality for 6months. Patient optimism was associated with clinician overestimation of their survival in a dose-response relationship. Clinicians were approximately three times as likely to overestimate the survival of patients endorsing both high trait optimism and optimistic ratings of their survival time compared with neither (OR: 2.95; 95% CI: 1.24-7.02). This association was not attenuated by adjustment for age, gender, race, ethnicity, education, income, cancer type, functional status, quality of life, or white blood cell count (ORadj : 3.45; 95% CI: 1.24-9.66). Patients' optimism may have some influence over their clinicians' prognostic judgments.

Optimistic credit rating and its influence on corporate decisions: evidence from Korea

Credit rating agencies have often been a target for criticism due to their inaccuracy and untimeliness. This paper sheds light on this issue by examining how an optimistic credit rating influences corporate decisions. We use Korean corporate credit ratings and construct the measure of credit rating optimism as the deviation of the actual ratings from benchmark ratings based on US corporate ratings. We find that rating optimism has a negative association with cost of debt and a positive relation with debt financing and investment. We also find that a positive relation between investment and future performance is weaker for firms with optimistic ratings. This finding suggests that inaccurate credit ratings would damage efficient capital allocation in the capital market.

Reputations and Credit Ratings - Evidence from Commercial Mortgage-Backed Securities

We examine a quasi-experimental setting where a rating agency (S&P) is completely shut out of a large segment of the commercial mortgage-backed securities market for more than one year, following a procedural mistake. We exploit the fact that many tranches of CMBS deals have multiple ratings. Subsequent to the drop in its business volume (but not before), S&P assigned higher ratings than other raters, in particular for large deals and for deals from important issuers. The results suggest that issuing optimistic ratings is a strategy that can be used by a rating agency with a weak reputation to gain market share in a market with strong competition.

The impact of issuer-pay on corporate bond rating properties: Evidence from Moody׳s and S&P׳s initial adoptions

This study examines whether and how the properties of corporate bond ratings change following Moody׳s and S&P׳s adoptions of the issuer-pay business model in the early 1970s. Regulators and debt market observers have criticized the issuer-pay model for creating an independence problem. However, the issuer-pay model allows for economic bonding between rating agencies and issuers through explicit contractual arrangements, which should improve the flow of nonpublic information. Using a difference-in-difference research design, I find that more optimistic ratings by issuer-pay rating agencies predict greater future profitability, differences between the ratings of issuer-pay and investor-pay rating agencies are associated with narrower secondary bond market bid-ask spreads, and that issuer-pay rating agencies become relatively more accurate and timely predictors of default compared to investor-pay agencies after the adoption of issuer-pay. These results reinterpret the recent findings of optimistic ratings by Jiang et al. (2012) as consistent with more informative bond ratings.

Evaluating Proposed Remedies for Credit Rating Agency Failures: Improving Independence and Justifying Departures from Quantitative Credit Rating Models

The overly optimistic debt ratings provided by credit rating agencies (CRAs) and the lack of transparency about the rating process have been criticized by regulators and pundits for exacerbating the financial crisis. We conduct a mixed-design experiment exploring how two proposals advanced by lawmakers affect the behavior of credit rating analysts. Using data taken from personal lending site Prosper.com, we examine whether (a) the requirement to justify departures from a quantitative model, and (b) conflicts of interests stemming from who pays the analysts affect rating characteristics. We then examine how justifying departures in turn influences the conflicts of interest faced by credit raters. We find that justifying departures reduces the likelihood that credit raters deviate from a quantitative model. Furthermore, credit raters who are not required to justify departures from the model tend to depart from the model in a direction that benefits the borrower, but only in the “borrower pays” condition. Additionally, credit raters facing conflict of interest appear to behave strategically and are less willing to lend their own money to borrowers, even if these credit raters assign more favorable ratings to these same borrowers. This study complements the existing archival literature on credit rating agencies and the conflicts of interest facing these agencies. Results of this study may inform regulators regarding the effectiveness of the different proposals on CRA reform.

Financial Institution Distress and its Implications for Rating Accuracy

Credit rating agencies have been heavily criticized both for providing overly optimistic ratings for structured finance products and the timeliness of their rating changes for financial institutions hit hard by the 2007 to 2009 crisis. While the role of rating agencies in the structured finance product market has been analyzed extensively, far less attention has been paid to the characteristics of ratings for financial institutions. This paper seeks to fill that gap by examining Standard and Poor’s rating timeliness and accuracy for distressed financial firms. Using a database covering multiple economic cycles, we find that distressed financial firms receive consistently stronger ratings than firms from other industries and that these differences exist over the firm’s entire rating history, including the year prior to eventual default. The discrepancy in rating is most pronounced for deposit taking institutions. Our results are robust to different definitions of distress, controls for macro-economic conditions, the existence of ratings from alternative agencies, and the elimination of observations from the recent financial crisis.

Assessing Credit or Determining Quantity? The Evolving Role of Rating Agencies

Over the past ten years, credit rating agencies have come under intense criticism from both practitioners and academics, first for their failure to identify problems resulting in bankruptcies at Enron and Worldcom and second for providing overly optimistic ratings for structured finance products. While many investors question the value of rating agencies in light of these criticisms, they have proven remarkably resilient. This paper provides a brief background on how rating agencies secured competitive advantages in evaluating credit quality. It then reviews the empirical evidence on the information content of ratings given these advantages. I argue that the information content of ratings stems from two intertwined sources: 1) information related to credit quality and 2) information related to the firm’s ability to access debt. Based on this evidence, I suggest that the dominant role for ratings today is as a benchmark for financial contracting. In this way, ratings remain influential in establishing the supply and demand of debt securities.

Is the association between optimistic cardiovascular risk perceptions and lower rates of cardiovascular disease mortality explained by biomarkers of systemic inflammation or endothelial function? A case-cohort study

BackgroundMore optimistic perceptions of cardiovascular disease risk are associated with substantively lower rates of cardiovascular death among men. It remains unknown whether this association represents causality (i.e. perception leads to actions/conditions that influence cardiovascular disease occurrence) or residual confounding by unmeasured factors that associate with risk perceptions and with physiological processes that promote cardiovascular disease (i.e. inflammation or endothelial dysfunction).PurposeTo evaluate whether previously unmeasured biological markers of inflammation or endothelial dysregulation confound the observed association between cardiovascular disease risk perceptions and cardiovascular disease outcomes;MethodsWe conducted a nested case-cohort study among community-dwelling men from Southeastern New England (USA) who were interviewed between 1989 and 1990 as part of the Pawtucket Heart Health Program. We measured C-reactive protein (CRP) and Vascular Endothelial Growth Factor (VEGF) levels from stored sera for a random sample of the parent cohort (control sample, n = 127) and all cases of cardiovascular death observed through 2005 (case sample, n = 44). We evaluated potential confounding using stratified analyses and logistic regression modeling.ResultsOptimistic ratings of risk associated with lower odds of dying from cardiovascular causes among men (OR = 0.39, 95% CI = 0.17, 0.91). Neither CRP nor VEGF confounded these findings.ConclusionsThe strong cardio-protective association between optimistic ratings of cardiovascular disease risk and lower rates of cardiovascular mortality among men is not confounded by baseline biomarkers of systemic inflammation or endothelial dysfunction.

Do Reputational Concerns Lead to Reliable Ratings?

This paper examines to what extent reputational concerns give rating agencies incentives to reveal information. It demonstrates that, in a simple model in which a rating agency has public and private information about a project, it may ignore private information and even contradict public information in an attempt to minimize reputational costs. A monopolistic agency can act conservatively by issuing too many bad ratings when a project is expected to be good based on private and public information. In a competitive setting, an agency becomes bolder and can issue too many good ratings when a project is expected to be bad based on private and public information. The paper provides a reason for why competition in the ratings industry might lead to overly optimistic ratings even in the absence of conflicts of interest.

What do people think about when answering questionnaires to assess unrealistic optimism about skin cancer? A think aloud study

There is little information concerning what people think about when completing questionnaires that assess perceptions of risk, and even less for questionnaires assessing unrealistic optimism. The thoughts of 40 participants who displayed unrealistic optimism about risks of skin cancer were elicited using think aloud methods, when completing both direct and indirect ratings of unrealistic optimism. The most common thoughts overall concerned exposure to the sun, and features such as skin colouring. Thoughts concerning prevalence, reasons for risky behaviour and admissions of ignorance were more common for indirect measures of unrealistic optimism than for direct measures. The direct unrealistic optimism measures yielded more optimistic ratings for those participants who did not mention symptoms or signs of skin damage, and those who mentioned thoughts about prevalence. Participants seem to be drawing upon different sources of information when completing superficially similar direct and indirect measures of unrealistic optimism, which may explain why these measures are usually only modestly associated. People do not seem to think about numerical probabilities when estimating risk, but instead appear to focus on issues such as exposure to risk, and concrete bodily symptoms and signs. This may at least partially explain why attempts to influence behaviour by providing probabilistic information are generally unsuccessful.

Childrens' notions of the malleability of their academic ability in the mother tongue and mathematics

The ways boys and girls (N = 119) at different grade levels rated and explained their potential for improvement in mathematics and the mother tongue were compared in order to examine their subject‐specific notions of the malleability of their academic ability. The findings indicate that children perceive their potential to improve their performance to be higher in mathematics than in the mother tongue. In the mother tongue the children's ratings of their potential for improvement became more pessimistic with advancement in the child's grade level. In mathematics the boys rated their potential for improvement higher than the girls did and trusted exertion as a means of improving their performance more than did the girls. Those children who gave optimistic ratings of their potential backed up their view by referring to the possibilities of practising and to the positive academic recognition they had received, and the role of these explanations grew stronger with advancement in the child's grade level. In contrast, those children who gave pessimistic ratings of their potential backed them up by referring to their poor performance and deficient ability. It was concluded that the optimistic pupils seem to place themselves in the ‘promotional sphere’ of the institution of school, whereas the pessimistic pupils seem to place themselves in the ‘restrictive sphere’ of education.

Method for Reducing Therapists' Bias When Judging Clients' Improvement

Therapists are often poor judges of clients' improvement and their judgments can be biased in either direction, false positive, or false negative. This study reports a method for reducing this bias. Twenty clients being transferred from one therapist to another as part of a normal rotation were studied. Two therapists terminating treatment and two new therapists (five clients each) filled out an 80-item questionnaire on each client giving the most realistic evaluation of the client's pathology. Another two terminating and two new therapists (five clients each) completed the same questionnaire twice-once giving the most optimistic and once the most pessimistic evaluation on each client's pathology. AU 20 clients were then seen for four sessions by two (10 clients each) experienced, expert diagnosticians to determine which new therapist was appropriate. The 10 clients (Group A) had the same assessment done by the old therapist, the new therapist, and an expert. Ten clients (Group B) had the same assessment done by the expert but had both an optimistic and pessimistic evaluation done by the old therapist and the new therapist. The data for every clients' questionnaire were run through a computer program designed by the author that yields every DSM-111 diagnosis for which there is substantial evidence or some evidence. Every client was given a pathology score, generated by giving the dient two points for each diagnosis with substantial evidence and one point for every diagnosis with only some evidence. For the therapists who had made two evaluations, the pathology points assigned were based on the mean of the optimistic and pessimistic assessments. An analysis of variance was performed on the pathology scores for both groups. Old therapists gave the clients a mean pathology score of 3.3, new therapists gave a rating of 5.2, while experts gave a rating of 4.7 (F2,,B = 13.16, p<.001) A Newman-Keuls post hoc test indicated all individual comparisons were significant. In Group B, the mean of optimistic and pessimistic ratings for old therapists was 3.4, for new therapists was 3.4 and experts' ratings were 3.6 (F,,,, = 0.72, ns). Asking the more novice therapists (old or new) to give the range of pathology rather than a most accurate assessment yielded better agreement with experts.

Powered-Lift Aircraft Handling Qualities in the Presence of Atmospheric Disturbances

Selected results are presented from a two-phased experimental program to investigate powered-lift aircraft handling quality degradation due to both naturally-occurring and computer-generated atmospheric turbulence. In phase I a variable stability helicopter was flown to simulate a powered-lift aircraft on final approach. In phase II a ground-based simulator with a moving cockpit and a colored visual display was used to represent the same powered-lift aircraft. During phase II a Dryden model of atmospheric turbulence was used together with actual wind profiles recorded during phase I. This paper focuses on the phase II results, which demonstrate that the Dryden model can yield optimistic ratings of airplane handling qualities in turbulent landing conditions. The model also leads to an optimistic estimate of combined pilot-vehicle performance degradation in turbulent flight.