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Split ratings and debt‐signaling in bond markets: A note
Author(s) -
Ismail Ashraf,
Oh Seunghack,
Arsyad Nuruzzaman
Publication year - 2015
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2014.12.003
Subject(s) - credit rating , debt , equity (law) , bond credit rating , monetary economics , bond , bond market , economics , point (geometry) , information asymmetry , emerging markets , business , econometrics , financial economics , actuarial science , finance , credit risk , credit reference , mathematics , geometry , political science , law
Split ratings occur when national and international credit rating agencies assign different ratings to the same firm. Employing various proxies for asymmetric information and data from advanced and emerging bond markets, we review the evidence that split ratings are caused by asymmetric information between firms and credit rating agencies. We then apply the debt‐signaling model to the split ratings problem, by testing for a systematic relationship between the debt‐to‐equity ratio and the magnitude of split ratings across countries. We finally test for the existence of an optimal debt‐signal, which implies that higher debt‐to‐equity ratios will reduce the ratings split to an optimal minimum, after which accumulating more debt widens the ratings split. Our results suggest that firms in emerging markets can use the debt‐signal up to a maximal point, after which it becomes inefficient.