Do Unsolicited Ratings Contain a Strategic Rating Component? Evidence from S&P

by Christina E. Bannier of Frankfurt School of Finance and Management,
Patrick Behr of Goethe-University Frankfurt, and
André Güttler of the International University, Rheingaustr

February 28, 2008

Abstract: This paper examines why, for non-U.S. firms, unsolicited ratings tend to be lower than solicited ratings. Both adverse selection and \strategic rating" arguments such as agency conservatism or blackmailing may be reasonable explanations. Comparing empirical default rates of firms with solicited and unsolicited S&P ratings between January 1996 and December 2006, we cannot reject the adverse selection hypothesis for the total sample. However, focusing on the more opaque sub-sample of banks we find that strategic rating seems to play an important role. Our results are robust to various additional tests, including CreditWatch and outlook information, the use of different default horizons, and of alternative outcome measures.

JEL Classification: G15, G24.

Keywords: Unsolicited Ratings, Adverse Selection, Rating Agency Conservatism.

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Related reading: "Why Do Firms Pay for Bond Ratings When They Can Get Them for Free? (Job Market Paper)".

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