Assessing the effort of rating agencies in emerging economies: Some empirical evidence

Abstract

Credit rating agencies (RAs) help reduce information asymmetries between corporate issuers and investors. However, although information asymmetries are more severe in emerging than in developed countries, corporate ratings bestow lower information content in the former. This is a problem since deserving corporations that are based in emerging countries require that the suitable rating they receive by a major RA—indispensable for them to issue debt in developed capital markets—be a credible signal to investors. Among the possible explanations, it is conjectured that this unsatisfactory situation might result from RAs not investing enough in collecting information on emerging countries’ corporations. Here, an indicator is used of RAs’ effort to gather information and test econometrically whether—controlling for both sovereign ratings and the corporate performance indicators used by RAs—higher effort affects corporate ratings. A negative relationship between RAs’ effort and corporate ratings is found in developed countries whereas the relationship is positive in emerging countries. While the result for developed countries is coherent with the hypothesis that RAs raise their effort vis-à-vis problematic corporations, the result for emerging countries is inconsistent with such hypothesis. This evidence suggests that inducing RAs to raise their effort is desirable for corporations in emerging countries.

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