Tightening Credit Standards: The role of accounting quality

by Philippe Jorion of the University of California, Irvine,
Charles Shi of the University of California, Irvine, and
Sanjian Zhang of Lehigh University

March 2009

Abstract: Over the latest 20 years, the average credit rating of U.S. corporations has trended down. Blume et al. (1998, Journal of Finance, 53, 1389-1413.) attribute this trend to a tightening of credit standards by agencies. We reexamine the observed decreases in credit ratings in several ways. First, we show that this downward trend does not apply to speculative-grade issuers. Second, our analysis of investment-grade issuers suggests that the apparent tightening of standards can be attributed primarily to changes in accounting quality over time. After incorporating changing accounting quality, we find no evidence that rating agencies have tightened their credit standards.

JEL Classification: G14, G32, M41.

Keywords: Credit rating agencies, Credit standards, Accounting quality, Earnings management, Value-relevance.

Published in: Review of Accounting Studies, Vol. 14, No. 1, (March 2009), pp. 123-160.

Previously titled: Tightening Credit Standards: Fact or Fiction?

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