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The valuation effects of bank loan ratings in the presence of multiple monitors

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Abstract

Studies have shown that when two information providers or outside auditors exist, the value provided by the second one will be decreased by the actions of the first. Credit rating agencies have been rating bank loans since 1996. Capitalizing on the highly similar functions performed by banks and these agencies, the informational value of bank loan ratings is examined. Further, evidence is provided on whether rating agencies duplicate the certifying and monitoring roles played by banks. The significant market reaction to negative bank loan rating announcements suggests these rating actions convey information beyond that provided via bank loan approvals and renewals.

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Authors and Affiliations

  1. Department of Marketing and Finance, Southeastern Louisiana University, Hammond, LA

    Thomas O. Meyer

  2. Department of Commerce, Massey University, Auckland, New Zealand

    Wei-Huei Hsu

  3. Department of Accounting, Brock University, St. Catharines, Ontario, Canada

    Fayez A. Elayan

Authors
  1. Thomas O. Meyer
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  2. Wei-Huei Hsu
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  3. Fayez A. Elayan
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Additional information

The authors wish to thank Richard Robinson (the Editor), an anonymous referee, Mary A. Lawrence, Abdullah Mamun, Brian Murphy, Lawrence Rose, Mark Vaughn, Massey University-Albany seminar, 2004 Financial Management Association and 2005 Academy of Financial Services participants for their helpful comments.

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Meyer, T.O., Hsu, WH. & Elayan, F.A. The valuation effects of bank loan ratings in the presence of multiple monitors. J Econ Finan 30, 325–346 (2006). https://doi.org/10.1007/BF02752739

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