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Rating shopping and rating inflation in Israel

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  • Bakalyar, Inna
  • Galil, Koresh

Abstract

Firms may exploit the option of choosing among different rating agencies in order to pick the highest rating offered. This possibility, known as rating shopping, is relatively limited on the US corporate bond market because the two main rating agencies (S&P and Moody's) rate virtually all large bond issuers. In this study, we use the data on corporate bond ratings assigned by two Israeli rating agencies affiliated with S&P and Moody's during the period 2004–2012. We show that while one agency (Midroog) systematically assigned higher ratings, the ratings of the other agency (S&P-Maalot) were inflated due to rating shopping. However, despite the many features that encourage rating inflation, the resulting distortion was relatively small (one notch). This may be a fair price for maintaining a competitive rating industry.

Suggested Citation

  • Bakalyar, Inna & Galil, Koresh, 2014. "Rating shopping and rating inflation in Israel," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 270-280.
    • Handle: RePEc:eee:finana:v:33:y:2014:i:c:p:270-280
    DOI: 10.1016/j.irfa.2014.03.005
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    References listed on IDEAS

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    Cited by:

    1. Wei Tian & Xiangyun Zhou & Yixiang Tian & Wei Meng, 2020. "Short-term competition and long-term convergence between domestic and global rating agencies: Evidence from China," PLOS ONE, Public Library of Science, vol. 15(5), pages 1-15, May.
    2. Vink, Dennis & Nawas, Mike & van Breemen, Vivian, 2021. "Security design and credit rating risk in the CLO market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    3. Vink, Dennis & Nawas, Mike & van Breemen, Vivian, 2021. "Security design and credit rating risk in the CLO market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    4. Uri Benzion & Eyal Lahav & Koresh Galil, 2015. "Debt composition and lax screening in the Israel corporate bond market," Working Papers 1504, Ben-Gurion University of the Negev, Department of Economics.
    5. Xiangyun Zhou & Yixiang Tian & Ping Zhang & Xiurong Chen, 2018. "Incentive and constraint regulations of rating inflation in collusion over the separation of economic cycles - Markov rating shopping dual reputation model," PLOS ONE, Public Library of Science, vol. 13(10), pages 1-18, October.
    6. Afik, Zvika & Feinstein, Itai & Galil, Koresh, 2014. "The (un)informative value of credit rating announcements in small markets," Journal of Financial Stability, Elsevier, vol. 14(C), pages 66-80.
    7. Benzion, Uri & Galil, Koresh & Lahav, Eyal & Shapir, Offer Moshe, 2018. "Debt composition and lax screening in the corporate bond market," International Review of Economics & Finance, Elsevier, vol. 56(C), pages 178-189.
    8. Mark Mietzner & Juliane Proelss & Denis Schweizer, 2018. "Hidden champions or black sheep? The role of underpricing in the German mini-bond market," Small Business Economics, Springer, vol. 50(2), pages 375-395, February.

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    More about this item

    Keywords

    Corporate bonds; Credit ratings; Rating agencies; Rating shopping; Rating inflation;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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