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

Abstract

Why do foreign firms obtain credit ratings by global rating agencies rather than from their home country's rating agencies even though global raters typically assign lower credit ratings when these foreign firms issue bonds in their home currencies? We find that bonds rated by a global agency decreased yields 11-14 basis points (bps) when compared to those rated by Japanese rating agencies but, during the 2007-2009 financial crisis, the yields on these Japanese bonds increased 12-17 bps, thus fully negating the advantage of obtaining a bond rating from a global rater. This suggests that the reputation of global rating agencies declined during the 2007-2009 crisis period.