Search results

This paper aims to propose an innovative blockchain-based system enabling implementation of a bond-pays model in credit rating industry. Issuer-pays model has led to conflict of interest resulting in rating shopping and inflation. Alternative business models have their own problems, e.g. investor-pays model suffers from “free rider” and public dissemination challenges, whereas government-controlled business models can lead to market distortion. Bond-pays model has been difficult to implement owing to operational difficulties in managing co-ordination amongst multiple entities involved, often with conflicting goals. Blockchain technology enables inter-organizational systems that foster trust amongst non-trusting entities, facilitating business functions such as credit rating to be carried out.

This paper outlines current processes in credit rating business that has led to repeated rating failures and proposes a new set of processes, leveraging capabilities of blockchain technology to enable implementation of an arms-length bond-pays model.

A proof-of-concept system, namely, rating chain has been designed to implement a small part of the proposed model to establish technical feasibility in a blockchain environment.

A fully functional blockchain-based system on bond-pays business model, if built and adopted, could impact how credit rating market functions currently and could contribute to a reduction in rating-related challenges.

The proposal to adopt blockchain technologies in implementing a bond-pays model in credit rating industry is a novel contribution.

This paper attempts to identify the areas for further research related to regulating credit‐rating agencies (CRAs), in order to assess whether the prerequisite for a “complete change” is present so to achieve a genuine paradigm shift on the matter.

An overview of the unregulated background of CRAs is presented followed by the European Union's and USA's regulatory initiatives together with a critical assessment of the former and an identification of the substantive areas for further thinking.

The adequacy of the recent CRAs regulation is questioned in the light of the need to take account of crucial elements such as scope, use of methodologies, due diligence and the regulatory reliance on ratings. A definition of competition is also warranted as well as a questioning of the “issuer pays” model and an assessment of the impact of ratings on systemic risk. An alternative regulatory response could take a more general view of regulating the credit‐rating activity as a whole and on a world wide scale.

This paper identifies areas for further research needed for an assessment of the most suitable regulation for the credit‐rating activity. Also, the paper focuses on the need to better understand the complicated nature, functioning and impact of CRAs in the financial system in order to map the different challenges for regulators, politicians, practitioners and academics.

This chapter differentiates the effect of solicited credit ratings (SCRs) and unsolicited credit ratings (UCRs) on bank leverage decision before and after the credit rating change. We find that banks with UCRs issue less debt relative to equity when the credit rating changes are approaching. Such findings are also prominent when bank credit rating moves from investment grade to speculative grade. After credit rating upgrades (downgrades), banks with unsolicited (solicited) credit ratings are inclined to issue more (less) debt relative to equity than those with solicited (unsolicited) credit ratings. We conclude that SCR and UCR changes lead to significantly different effects on bank leverage decision.

The purpose of this paper is to shed light on the causes of the 2007‐2009 mortgage crisis, liquidity crisis, stock market volatility in the USA and their spillover effects on the global economy.

The paper critically reviews the 2007‐2009 financial crisis from both academic and practitioners' viewpoints.

The paper explores how the liquidity crisis has evolved with the advent of poorly supervised financial products, especially the credit default swaps and subprime mortgage loans. Further, it analyzes the laxity in regulations that encouraged high financial leverages, shadow banking system and excessive stock market volatility and worsened the recent financial crisis.

The implication of this paper is to understand numerous policy reforms that will help the global capital markets to be more transparent and less vulnerable to systematic risks; the suggested policy reforms may also help to prevent such financial calamities in the future.

The purpose of this paper is to empirically examine the relationship between the level of underwriter spread and ownership structure by using data from Japanese IPO firms that are issued during the years 1997‐2002.

The paper uses regression analysis to determine the effect of the ownership structure (board, bank, affiliated venture capital firms) on underwriter spread and on the post‐issue operating performance of IPO firms.

This paper finds several results that are in contrast with previous studies. The ownership by board members is positively associated with the level of gross spread but is not associated with post‐issue operating performance. The presence of a commercial bank in the ownership structure of IPO firms decreases the gross spread and increases the post‐issue operating performance of IPO firms. Issuers pay a lower underwriting fee as the ownership share of the lead underwriter‐affiliated VC increases, unlike that of other VCs.

The results of this paper, supporting certification and monitoring hypotheses, contribute to academic research. Most previous studies do not support certification effects.

The purpose of this paper is to examine the potential effectiveness of government reforms aimed at improving the accuracy of ratings issued by credit ratings agencies in US financial markets.

The paper identifies unconscious bias as a source of inaccuracy in the credit ratings process. It examines prior behavioral research on unconscious bias, and uses this research to identify structural issues within the credit ratings industry that give rise to biased judgments. Finally, it examines whether government reforms will be effective in improving the accuracy of credit ratings, and offers additional reforms aimed at combating unconscious bias.

Recent government reforms will be most effective in curbing intentional decisions to compromise the ratings process. However, the reforms will be less effective at mitigating unconscious biases in judgments underlying credit ratings, because they do not adequately address relevant structural issues. To combat unconscious bias, changes need to be made to ratings agencies' fee structures, business models, and risk management functions.

The analysis is of use to regulators who are contemplating the need for reforms aimed at improving the accuracy of credit ratings. While focusing on events in the USA, the analysis is relevant to any country in which credit ratings are influential in financial markets.

This is the first paper to examine the performance of credit ratings agencies through the lens of behavioral psychology, and to introduce the concept of unconscious bias as a determining factor in the accuracy of credit ratings.

This paper aims to measure the trade price impact of a recent regulatory disclosure intervention in municipal securities secondary markets, which required broker-dealers to disclose securities trading information on a near-real-time and continuing basis.

The author analyzes trade price outcomes in the preintervention and postintervention regimes using a suite of time series estimations that give heteroskedasticity-robust standard errors (Prais–Winsten and Cochrain–Orcutt), accommodate higher-order lag structure in the error term (autoregressive integrated moving average) and account for volatility clustering in the time series (generalized autoregressive conditional heteroskedasticity).

Results show that regulatory disclosure intervention significantly improved trade price efficiency in municipal securities secondary markets as daily trade price differential and volatility both declined market-wide after the disclosure intervention.

The sample consists of trades in State of California general obligation bonds; therefore, empirical findings may not be generalizable to other states, local governments and different types of bonds.

The findings highlight voluntary information disclosure as a practical and effective mechanism in disclosure regulation of municipal securities secondary markets.

Only a small body of work exists that examines information disclosure regulation in municipal securities secondary markets; therefore, this paper expands knowledge on the topic and should provide renewed impetus for regulatory efforts aimed at improving the efficiency of municipal capital markets.

The 2000–2006 housing market bubble conformed to a classic boom–bust scenario that triggered the most serious and costly financial crisis since the Great Depression. The 2008 subprime mortgage collapse leveraged a financial system that privatizes profits and socializes risks. Several factors converge to set up the subprime mortgage market as an easy target for industry insiders to exploit. Enabling legislation expanded the potential pool of borrowers eligible for subprime mortgages and structured incentives to lenders willing to assume the risks. The securitization of subprime mortgages transformed bundles of high-risk loans into mortgage-backed securities that were in demand by domestic and foreign investors. Pressure to edge out competition produced high-risk loans marketed to unqualified borrowers. The final piece in the setup of the subprime lending crisis was a move from an origination model to a distributive model by many financial institutions in the business of lending. We find that the diffusion and totality of these business practices produced a criminogenic opportunity structure for industry insiders to profit at the expense of homebuyers and later investors.

The purpose of this study is to examine the relationship between going-concern (GC) opinions issued by the Big 4 audit firms and adverse credit ratings from the two largest credit rating agencies (CRAs) – Standard & Poor’s (S&P) and Moody’s. This question is relevant because there have been suggestions that auditors and CRAs should become more similar to each other, and because the two largest CRAs have different ownership structures that could affect their ratings.

Univariate and multivariate analyses are performed using a sample of firms that filed for bankruptcy between January 1, 2002 and December 31, 2013 that also had an audit opinion signed during the 12 months prior to bankruptcy, along with a credit rating issued by either or both S&P and Moody’s. Both influence each other. The likelihood of an auditor issuing a GC opinion is related to the credit rating issued by both S&P and Moody’s in the month prior to the audit report signing. The results also show differences between the CRAs. S&P reacted in the month after an auditor issued a GC opinion by downgrading its ratings 68% of the time. However, Moody’s did not react as strongly as S&P, downgrading its ratings only 24% of the time.

Both audit reports and credit ratings influence each other. The likelihood of an auditor issuing a GC opinion is related to the credit rating issued by both S&P and Moody’s in the month prior to the audit report signing. The results also show differences between the CRAs. S&P reacted in the month after an auditor issued a GC opinion by downgrading its ratings 68% of the time. However, Moody’s did not react as strongly as S&P, downgrading its ratings only 24% of the time.

Auditors are more likely to issue GC opinions when there is a downgrade to the credit rating, and CRAs are more likely to downgrade their ratings when there is a GC opinion. The study highlights that CRAs with different ownership structures provide different credit rating outcomes.