An Examination of Rating Agencies’ Actions Around The Investment-Grade Boundary

By: Richard Johnson, Research Division, Federal Reserve Bank Of Kansas City |

Direct excerpts and conclusions:

Overall, it is robustly the case that S&P’s re-grades moved in the direction of EJR’s earlier ratings. It appears more likely that this result reflects systematic differences between the two firms rating policies than a small number of lucky guesses by EJR.

A comparison between S&P’s and EJR’s ratings shows that, conditional on S&P’s upgrading or downgrading a firm,its new grade was correlated with the grade EJR had awarded at least ten weeks earlier. This suggests that S&P defines its ratings more widely in terms of default probabilities than EJR.

It also suggests that S&P’s large downgrades do not occur immediately after negative surprises to firms, but rather after a steady accumulation of bad news which EJR’s ratings previously reflected.

S&P ratings converge toward Egan-Jones Ratings.

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