Rating Agency Reputation, the Global Financial Crisis, and the Cost of Debt

It has been a puzzle why foreign firms obtain credit ratings by global rating agencies such as S&P or Moody’s rather than from their home country’s rating agencies even though the global raters typically assign lower credit ratings when these foreign firms issue bonds in their home currencies. In addition, unlike firms in the U.S., foreign firms are not required to obtain ratings from the SEC-sanctioned Nationally Recognized Statistical Rating Agencies (NRSROs). We investigate this puzzle with new 3,525 yen-denominated plain vanilla bonds issued in Japan during 1998-2009 and find that bonds rated by at least one global agency can, on average, result in yields that are 11-14 bps lower than those rated by only Japanese rating agencies. However, during the 2007-2009 financial crisis, Japanese issuers which used S&P and Moody’s actually faced yields that were 14-19 bps higher, thus negating the prior advantage of obtaining a bond rating from a global rating firm, after controlling for other factors. This suggests that the credibility and reputation of the global rating agencies such as S&P and Moody’s have declined following public disclosure of these firms’ problems associated with the subprime mortgage securitization process. In addition to the greater size and longer maturity of the bond issue, we find that Japanese firms with more financial leverage, greater information asymmetry, higher levels of equity ownership by foreigners, poor financial performance, and greater systematic risk are more likely to seek ratings from Moody’s or S&P rather than Japanese rating agencies.