Is there a difference in treatment between solicited and unsolicited bank ratings and, if so, why?

Abstract

This paper analyses the effect of soliciting a rating on the rating outcome of banks. This type of analysis sheds light on an important policy question, namely whether there is a difference in treatment between banks which request a rating and those which do not. Using a sample of Asian banks rated by Fitch Ratings, I find evidence that unsolicited ratings tend to be lower than solicited ones after accounting for differences in financial and non-financial characteristics between banks. This downward bias does not seem to be explained by the self-selection hypothesis, which states that banks with more favourable private information self-select into the solicited group because they can obtain higher ratings by doing so. Rather, unsolicited ratings appear to be lower because they are only based on public information and, as a result, they tend to be more conservative than solicited ones. This is shown by testing the public disclosure hypothesis, which states that the difference in treatment between solicited and unsolicited ratings disappears when banks with an unsolicited rating release enough public information to compensate for the absence of private information. Overall, the findings of this study have important policy implications for the reform of the credit rating industry and for the Third Pillar of the New Basel Accord.unsolicited ratings, treatment effect, switching regression, public disclosure