Search

Copyright of NTU Management Review is the property of NTU Management Review and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

This article demonstrates that rating-based capital requirements, through their impact on insurers' investment demand, affect corporate bond prices. Consistent with insurers' low demand for investment-grade bonds with a rating close to noninvestment-grade, these bonds outperform. Consistent with insurers' high (low) demand for investment-grade bonds with high (low) systematic risk exposure, these bonds underperform (outperform). Insurer demand, measured by insurer holdings, explains most of these pricing effects. We identify rating-based capital requirements as the driver of insurer demand, and thus the pricing effects, by showing that the effects do not exist before these requirements' implementation in 1993. [ABSTRACT FROM AUTHOR]

This paper investigates split credit ratings awarded by Moody's and Standard & Poor's (S&P) to U.S. corporations. Bivariate probit model estimates, analyzing 5,238 firm-year observations from dual-rated S&P 500/400/600 index-constituent corporations, indicate firm-specific financial and governance characteristics predict split ratings. Large, profitable companies with enhanced interest coverage, a greater percentage of independent directors, and more institutional investment are less likely to receive splits. Moody's appears more conservative in its evaluations, assigning lower ratings to smaller, less profitable companies with low interest coverage. Moody's also associates external, independent constraints on managerial autonomy with a higher corporate credit standing relative to S&P. [ABSTRACT FROM AUTHOR]

Abstract: Using detailed origination and performance data on a comprehensive sample of commercial mortgage‐backed security (CMBS) deals, along with their underlying loans and a set of similarly rated residential mortgage‐backed securities (RMBS), we apply reduced‐form and structural modeling strategies to test for regulatory‐capital arbitrage and ratings inflation in the CMBS market. We find that the spread between CMBS and corporate‐bond yields fell significantly for ratings AA and AAA after a loosening of capital requirements for highly rated CMBS in 2002, whereas no comparable drop occurred for lower rated bonds (which experienced no similar regulatory change). We also find that CMBS rated below AA upgraded to AA or AAA significantly faster than comparable RMBS (for which there was no change in risk‐based capital requirements). We use a structural model to investigate these results in more detail and find that little else changed in the CMBS market over this period except for the rating agencies' persistent reductions in subordination levels between 1997 and late 2007. Indeed, had the 2005 vintage CMBS used the subordination levels from 2000, there would have been no losses to the senior bonds in most CMBS structures. [ABSTRACT FROM AUTHOR]

We investigate the managerial incentives and debt cost effects associated with budget-to-actual variance disclosures required by the GASB No. 34 reporting model. Empirically, we document associations between variances and municipal bond ratings in a sample of large U.S. cities over the period 2003-2006. We find a disproportionate share of favorable variances for revenues, expenditures, and the net (i.e., surplus/deficit). Further, we show that revenue variances in either direction are associated with lower bond ratings, i.e., precision is important in predicting revenues. In contrast, favorable expenditure variances are associated with higher bond ratings, i.e., imprecision may be tolerated if the variance is favorable. These associations exist despite indirect evidence of managerial incentives to create budgetary slack for both revenues and expenditures. The findings suggest that these disclosures required in the GASB No. 34 financial reporting model indicate factors that influence municipal debt costs. [ABSTRACT FROM AUTHOR]