Professor Al Ghosh spoke at the 39th Annual Meeting of the European Finance Association 2012 in Copenhagen, Denmark. During this presentation, Professor Ghosh discusses whether cross-listed bonds are rated more conservatively than U.S. domestic bonds.
ABSTRACT: We investigate whether cross-listed bonds are rated more conservatively than U.S. domestic bonds. We argue that because of the high information asymmetry of cross-listed bonds, investors are more reliant on ratings, which in turn increases rating agencies’ exposure to reputation losses when foreign issuers default but ratings indicate otherwise. We expect this heightened reputation concerns to motivate rating agencies to be more conservative when rating cross-listed bonds than when rating domestic bonds. Consistent with our expectations, we find that cross-listed bonds have lower ratings at issuance and subsequently are less likely (and take longer) to be upgraded than comparable U.S. domestic bonds. We also find that rating conservatism is more pronounced for investment-grade cross-listed bonds, consistent with the higher reputational concerns for investment-grade bonds. Finally we examine a competing explanation that rating agencies’ private information indicates higher default risk for cross-listed bonds. We find that the lower ratings of cross-listed bonds are more likely to raise false alarms, less likely to miss future defaults, and are also corrected by a lower spread at issuance. Collectively, the evidence suggests that rating conservatism is a more plausible explanation for our finding than the private information explanation.by