Tightening Credit Standards: The Role of Accounting Quality
Posted: 11 Oct 2007
Over the latest 20 years, the average credit rating of U.S. corporations has trended down. Blume, Lim, and Mackinlay (1998) attribute this trend to a tightening of credit standards by agencies. We reexamine the observed decreases in credit ratings in several ways. First, we show that this downward trend does not apply to speculative-grade issuers. Second, our analysis of investment-grade issuers suggests that the apparent tightening of standards can be attributed primarily to changes in accounting quality over time. After incorporating changing accounting quality, we find no evidence that rating agencies have tightened their credit standards.
Keywords: credit rating agencies, credit standards, accounting quality, earnings management, value-relevance
JEL Classification: G14 G32 M41
Suggested Citation: Suggested Citation