Cross-listed bonds and rating conservatism
Atılgan, Yiğit and Ghosh, Aloke and Zhang, Jieying (2010) Cross-listed bonds and rating conservatism. (Submitted)
In this paper we investigate rating conservatism in the setting of cross-listed bonds. We hypothesize that ratings agencies are more conservative when rating cross-listed bonds, because greater information asymmetry and greater reliance on ratings for investment decisions and debt contracting makes their loss function more asymmetric. Consistent with our expectation, we nd that cross-listed bonds have lower initial ratings, are less likely to be upgraded and take longer to be upgraded compared to the U.S. domestic bonds with similar issuer and issue characteristics. To di¤erentiate between the conservatism and private information explanation, we rely on three distinct tests. First, we show that the lower rating is concentrated among investment grade bonds, consistent with rating agencies being more conservative when reputation cost is higher. Second, we provide evidence that the ratings of cross-listed bonds are less likely to miss default and more likely to give false warnings, lending direct support to rating conservatism. Lastly, we document that the bond market corrects for the lower rating by assigning a lower spread for foreign bonds, further suggesting that rating conservatism explanation is more plausible.
Repository Staff Only: item control page