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Perceptions of the implementation of credit rating agency regulation in South Africa
BackgroundCredit rating agencies (CRA) played a key role in the global financial crises of 2007/2008 which led to the introduction of CRA regulation.AimUsing Giddens’ theory of modernity as a framework, this article analyses experts’ perceptions of the implementation of the CRA regulation in South Africa.SettingThis article focussed on experts’ perceptions of CRA regulation in South Africa.MethodThis qualitative article was conducted using detailed interviews with South African experts in the investing and credit rating industries. Interviews were conducted in 2013 and 2023. An interpretive approach was adopted to analyse the data into themes, providing insight into the perceptions relating to the introduction of CRA regulation in South Africa.ResultsWhile the introduction of CRA regulation in South Africa is a mechanism used to legitimise the capital system and encourage foreign investment, its applicability, considering the size of the country’s CRA market, is contentious. Credit rating agencies’ current business model is prone to conflicts of interest and no viable alternatives are available. Consequently, investors need to exercise judgement over their investment decisions instead of outsourcing their due diligence requirements to CRA without careful consideration.ConclusionCredit rating agencies’ regulation in South Africa has further cemented CRA’s position in financial markets in line with global trends in this industry.ContributionThis article will allow policymakers, market participants and researchers to understand the perceptions of the CRA regulation in South Africa from a social constructivist perspective.
Journal Article
A method to recommend cloud manufacturing service based on the spectral clustering and improved Slope one algorithm
The booming growth of cloud manufacturing services provides users with more choices. However, cloud manufacturing service recommendation remains a challenging issue due to numerous similar candidate services and diverse user preferences. The purpose of this paper is to provide an efficient and accurate cloud manufacturing service recommendation method. A spectral clustering algorithm is first designed to cluster the cloud manufacturing services. Then the candidate rating service set is constructed based on the service clusters by service function comparison and parameter matching. Finally, an improved Slope one algorithm, which integrates user similarity and service similarity, is proposed to rate the cloud manufacturing services. The top-k services with the highest scores are recommended to the users. Experiments show that the proposed method can provide more accurate service rating with less time consumption. The service recommendation performance of this method is also proved to be superior to other methods in terms of precision, recall, and F-score.
Journal Article
The Real Effects of Credit Ratings: The Sovereign Ceiling Channel
We show that sovereign debt impairments can have a significant effect on financial markets and real economies through a credit ratings channel. Specifically, we find that firms reduce their investment and reliance on credit markets due to a rising cost of debt capital following a sovereign rating downgrade. We identify these effects by exploiting exogenous variation in corporate ratings due to rating agencies' sovereign ceiling policies, which require that firms' ratings remain at or below the sovereign rating of their country of domicile.
Journal Article
The Credit Ratings Game
The collapse of AAA-rated structured finance products in 2007 to 2008 has brought renewed attention to conflicts of interest in credit rating agencies (CRAs). We model competition among CRAs with three sources of conflicts: (1) CRAs conflict of understating risk to attract business, (2) issuers' ability to purchase only the most favorable ratings, and (3) the trusting nature of some investor clienteles. These conflicts create two distortions. First, competition can reduce efficiency, as it facilitates ratings shopping. Second, ratings are more likely to be inflated during booms and when investors are more trusting. We also discuss efficiency-enhancing regulatory interventions.
Journal Article
Have Rating Agencies Become More Conservative? Implications for Capital Structure and Debt Pricing
Rating agencies have become more conservative in assigning corporate credit ratings over the period 1985 to 2009; holding firm characteristics constant, average ratings have dropped by three notches. This change does not appear to be fully warranted because defaults have declined over this period. Firms affected more by conservatism issue less debt, have lower leverage, hold more cash, are less likely to obtain a debt rating, and experience lower growth. Their debt spreads are lower than those of unaffected firms with the same rating, which implies that the market partly undoes the impact of conservatism on debt prices. This evidence suggests that firms and capital markets do not perceive the increase in conservatism to be fully warranted.
Journal Article
Credit Rating Inflation and Firms' Investments
We analyze credit rating effects on firm investments in a rational bond financing game that features a feedback loop. The credit rating agency (CRA) inflates the rating, providing a biased but informative signal to creditors. Creditors' response to the rating affects the firm's investment decision and thus its credit quality, which is reflected in the rating. The CRA might reduce ex ante economic efficiency, which results solely from its strategic effect: the CRA assigns more firms high ratings and allows them to gamble for resurrection. We derive empirical predictions on the determinants of rating standards and inflation and discuss policy implications.
Journal Article
Markets: The Credit Rating Agencies
This paper will explore how the financial regulatory structure propelled three credit rating agencies—Moody's, Standard & Poor's (S&P), and Fitch—to the center of the U.S. bond markets—and thereby virtually guaranteed that when these rating agencies did make mistakes, these mistakes would have serious consequences for the financial sector. We begin by looking at some relevant history of the industry, including the series of events that led financial regulators to outsource their judgments to the credit rating agencies (by requiring financial institutions to use the specific bond creditworthiness information that was provided by the major rating agencies) and when the credit rating agencies shifted their business model from “investor pays” to “issuer pays.” We then look at how the credit rating industry evolved and how its interaction with regulatory authorities served as a barrier to entry. We then show how these ingredients combined to contribute to the subprime mortgage debacle and associated financial crisis. Finally, we consider two possible routes for public policy with respect to the credit rating industry: One route would tighten the regulation of the rating agencies, while the other route would reduce the required centrality of the rating agencies and thereby open up the bond information process in way that has not been possible since the 1930s.
Journal Article
Did Subjectivity Play a Role in CDO Credit Ratings?
Analyzing 916 collateralized debt obligations (CDOs), we find that a top credit rating agency frequently made positive adjustments beyond its main model that amounted to increasingly larger AAA tranche sizes. These adjustments are difficult to explain by likely determinants, but exhibit a clear pattern: CDOs with smaller model-implied AAA sizes receive larger adjustments. CDOs with larger adjustments experience more severe subsequent downgrading. Additionally, prior to April 2007, 91.2% of AAA-rated CDOs only comply with the credit rating agency's own AA default rate standard. Accounting for adjustments and the criterion deviation indicates that on average AAA tranches were structured to BBB support levels.
Journal Article
Corporate Social Responsibility and Credit Ratings
This study provides evidence on the relationship between corporate social responsibility (CSR) and firms' credit ratings. We find that credit rating agencies tend to award relatively high ratings to firms with good social performance. This pattern is robust to controlling for key firm characteristics as well as endogeneity between CSR and credit ratings. We also find that CSR strengths and concerns influence credit ratings and that the individual components of CSR that relate to primary stakeholder management (i.e., community relations, diversity, employee relations, environmental performance, and product characteristics) matter most in explaining firms' creditworthiness. Overall, our results suggest that CSR performance conveys important non-financial information that rating agencies are likely to use in their evaluation of firms' creditworthiness, and that CSR investments—particularly those that extend beyond compliance behavior to reflect what is desired by society—can lead to lower financing costs resulting from higher credit ratings.
Journal Article