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The Determinants and Information Value of Credit Watches
Kee H. Chung, SUNY At Buffalo
Carol Ann Frost, SUNY at Buffalo
Myungsun Kim, SUNY at Buffalo
ABSTRACT. This study analyzes 3,370 credit watches and 8,318 rating changes covering 14 years from 1992 through 2005 using data from Moody’s Default Risk Service. We perform much more comprehensive tests of the information role of credit watches than have been conducted to date. We also test whether CRAs issue credit watches as a way to facilitate the use of credit ratings in contracting. By issuing a credit watch, a CRA can convey new information about credit quality, but at the same time delay the issuance of an actual rating change until a definitive change in an issuer’s credit quality has occurred, thereby increasing ratings stability. We observe a strong negative (positive) market response associated with down (up) watches. Also we find that CRAs’ propensity to issue credit watches is associated with proxies for the information value and demand for credit watches.
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