Why they keep missing: An empirical investigation of rational inattention of rating agencies

Author
El-Shagi, Makram · Von Schweinitz, Gregor
Published 2017
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Abstract

Although there is a wide consensus that rating agencies have frequently failed to predict major crises, the literature on sovereign ratings has so far mostly focused on explaining the rating level rather than explaining the timing of the rating decision. In this paper we aim to fill this gap in the literature. Moreover, we go beyond the previous literature by explicitly differentiating between a decision to assess a country and the actual rating decision. Thereby, we take rational inattention of rating agencies into account that should exist due to the cognitive and informational costs of a reassessment. Exploiting information of rating announcements, we can show that (i) the differentiation between the two decision processes significantly improves the model explaining rating decisions; (ii) rating agencies take many nonfundamental factors in their decision to reassess a country into account; (iii) markets only react to ratings if these ratings supply genuinely new information; and (iv) that developed country get preferential treatment.

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Details

Title
Why they keep missing: An empirical investigation of rational inattention of rating agencies
Author
El-Shagi, Makram · Von Schweinitz, Gregor
Year
2017
Published
2017
Type
Research Paper
Language
eng
Keywords
Rating Agencies · Sovereign Risk · Rational Inattention · Discrete Regression And Qualitative Choice Models · International Lending And Debt Problems · Investment Banking · Venture Capital · Brokerage
This is Version 1 of this record. We added this version on February 1, 2017. This version is based on an original data import from RePEc.