The Studies Conducted Abroad

Published Date: 02 Nov 2017

2.1. INTRODUCTION

Review of related literature is very important for undergoing a dissertation as it gives valuable and in depth detailed inputs on the problem issues relative to the project. It basically refers to the research conducted by the scholars and industry experts in which their opinions and suggestions are highlighted in particular. These outputs will be useful at the several stages of the dissertation project and thus find its significance in any research study.

2.2. STUDIES CONDUCTED ABROAD

Financial Ratios and the Probabilistic Prediction of Bankruptcy. James A. Ohlson. Journal of Accounting Research Vol. 18 No. 1. (1980). This paper presents some empirical results of a study predicting corporate failure as evidenced by the event of bankruptcy. The econometric methodology of conditional logit analysis was chosen to avoid problems associated with Multivariate Discriminant Analysis. The statistical significance of the different predictors is obtained from asymptotic (large sample) theory. The author concludes that the predictive power of any model depends upon when the information (financial report) is assumed to be available. The predictive powers of linear transforms of a vector of ratios seem to be robust across (large sample) estimation procedures. Additional predictors could be used to probably improve the research.

Tests of analysts’ overreaction/underreaction to earnings information as an explanation for Anomalous stock price behaviour. Jeffry S. Abarbanell. Victor L. Bernard. The Journal of Finance. (Jul. 1992). This study examines whether security analysts underreact or overreact to prior earnings information, and whether any such behavior could explain previously documented anomalous stock price movements. Data used in this study include primary EPS and corresponding Value Line forecasts, as well as stock price data for 178 firms and up to 44 quarters spanning the period 1976 through 1986. Regression and correlation analysis have been done to test the hypotheses stated. Stock prices never reflect the properties of the firm and analysts generalized overreaction is not easily viewed as an overreaction to earnings and not clearly connected to overreaction in stock prices. Studies documenting the stock price overreaction always partition firms on the basis of prior stock price performance, while those documenting either no overreaction or underreaction in stock prices partition on the basis of prior earnings performance. There exists a variety of unidentified causes in the research which is most likely to surface among stock prices.

Errors in Estimating Accruals: Implications for Empirical Research. Daniel W. Collins. Paul Hribar. (September 10, 2000). This paper examines the impact of measuring accruals as the change in successive balance sheet accounts, as opposed to measuring accruals directly from the statement of cash flows. Data has been obtained from Compustat database and the variables are computed. Two models have been developed and the test statistics have been done. Regression analysis has been carried out to find the impact on the explanatory variables on the independent variable. The results suggest that many studies concerned with possible differential pricing implications of discretionary and nondiscretionary accruals are adversely affected by measurement errors introduced by the balance sheet approach to accruals measurement. In particular, tests that discretionary and nondiscretionary accruals are priced the same are less likely to be rejected when accruals are measured using the balance sheet approach as compared to when they are measured correctly from the cash flow statement. The variables used have a little scope and demand an expansion of variables for further research and deeper understanding.

Insider Trading, Earnings Quality and Accrual Mispricing. Messod D. Beneish. Mark E. Vagus. The Accounting Review. (Oct 2002). This paper investigates whether insider trading is informative about earnings quality and the valuation implication of accruals. The methodology used in this paper is descriptive research and the author used to test the various hypothesis and sample characteristics have been identified. Models have been constructed using different explanatory variables and conclusions were arrived from the data analysis and other empirical tests. Results suggest that insider trading information is useful in ex ante identifying whether firms’ income-increasing accruals are low or high. This paper also provides evidence that insider trading is an informative signal about earnings quality and the valuation implications of accruals. The assumptions made in the research have not been supported and several measurement errors have been stated. Further research could be made on removing all these serious limitations.

Credit Rating Agencies: Their Impact on Capital Flows to Developing Countries. Gautam Setty, Randall Dodd (April 2003) This paper examines the three major credit rating agencies, their rating methods and several related public policy concerns. It examines the regulatory background and competitive structure of the credit rating industry, the historical performance of the major agencies and the impact of ratings on economies and capital flows. The study was restricted to the ratings from the CRAs and their impact on the cash flows which is less justified without the efficient use of statistical tools. Further, evidences and the magnitude of impact have not been studied using tools.

The Quality of Corporate Credit Rating: an Empirical Investigation. Koresh Galil. (October 2003). The study is about the rating firms’ need for reputation and competitiveness in the rating industry force rating agencies to provide ratings that are efficient with respect to the information available at the time of rating. In this paper, survival analysis has been used to test the quality of S&P corporate credit ratings in the years 1983-1993. Using sample data from 2631 bonds, evidence has been provided that ratings could be improved by using publicly available information and that some categorizations of ratings were not informative. The methodological contribution of this paper is the introduction of proportional hazard models as the appropriate framework for parameterizing the inherent ratings information. The study shows that some publicly available information was not efficiently incorporated in the assignment of ratings. The significance of this result appears to depend on the broadness of industry definitions. Hence, it is possible to suggest that the lack of incorporation of this publicly available information in ratings is due to lack of integration of the varying interpretation of these variables across the different industries.

The Usefulness of Core and Non-Core Cash Flows in Predicting Future Cash Flows. C. S. Agnes Cheng. Dana Hollie. (January 2005). The objective of this study is to determine whether accrual components reflect different information relating to future cash flows using our sample and time period. Also, the authors investigated whether cash flow components reflect different information relating to future cash flows beyond that of accrual components. The authors examined various cash flow prediction models by using goodness of fit test across models: models with aggregate cash flows versus models with cash flow components. They analyzed two sets of cash flow prediction models, one set focusing only on cash flow information and the other focusing on extending BCN’s model by disaggregating cash flows. The authors found that core cash flow components do reflect different information relating to future cash flows. And, core components persist similarly amongst themselves but differently from non-core cash flow components, which are not similar in persistence amongst non-core components. It was also found that the disaggregation of cash flow components into the BCN Model significantly enhances cash flow prediction. Improving cash flow and cash flow prediction have not been clearly explained in the research paper.

The effects of rating through the cycle on rating stability, rating timeliness and default prediction performance. Edward I. Altman. Herbert A. Rijken. (March 2005). This study aims to provide quantitative insight in the methodology and to quantify the effects of the methodology on rating stability, rating timeliness and default prediction performance, from an investor's point-in-time perspective. The benchmark credit scoring models are analyzed and all prediction models have been estimated by logit regression models. Several mathematical ratios have been computed to arrive at the conclusion. A rating migration is triggered if the actual credit quality – permanent credit quality component - exceeds a threshold of 1.8 notch steps relative to the average credit quality level in a rating class. The question of whether the information advantage of agencies reappears when Rating Outlook and Watch list information is taken into account has not been answered.

Informational effects of regulation FD: Evidence from rating agencies. Philippe Jorion, Zhu Liu, Charles Shi. Journal of Financial Economics 76 (2005) 309–330. The authors intend to examine the effect of credit rating changes on stock prices and find that the informational effect of downgrades and upgrades is much greater in the post-FD period. The authors gathered the rating changes data from the Mergent Fixed Investment Securities Database (FISD), which contains detailed information on over 90,000 corporate, U.S. agency, and U.S. Treasury debt securities. Further data analysis and correlation study has been made. The model has been developed indicating various dependent and independent variables and regression analysis has been done. The empirical evidence in this paper indicates that Regulation FD altered the informational advantage of rating agencies. After Reg FD, rating agencies became privileged conduits of selective disclosure to the public. As a result, it was found that the effect of rating changes on stock prices has become more pronounced. Both downgrades and upgrades now have a bigger effect on stock prices. The variables in the study could be expanded as the regression score indicates that it could explain the impact of only few variables.

Credit Rating Agencies in Capital Markets: A Review of Research Evidence on Selected Criticisms of the Agencies. Carol Ann Frost. Journal of Accounting, Auditing, and Finance. (June 27, 2006). This study assesses the validity of widespread criticisms of the large, "nationally recognized" credit rating agencies (CRAs). This paper evaluates important criticisms of the CRAs discussed in a recent SEC staff report by using evidence from empirical research studies. Empirical research has been used and the authors reviewed the various researches and thus forming out to be an exploratory research. Based on the evidences obtained the authors have concluded with the different suggestions. Numerous suggestions for potential accounting research are given throughout this paper. Evidence from these studies, if they are conducted, would provide highly useful input to lawmakers and regulators as they continue to assess the role of CRAs, and whether additional legislation or regulatory oversight of the industry is warranted. As the authors have done an exploratory research it could be aided with the statistical tools and further analysis could be an added improvement.

The effects of corporate governance on firms’ credit ratings. Hollis Ashbaugh-Skaif. Daniel W. Collins. Ryan LaFond. Journal of Accounting and Economics 42 (2006) 203–243. The authors investigate whether firms that possess strong corporate governance benefit from higher credit ratings relative to firms with weak governance. Data for this study are compiled from various sources and he authors have identified variables and studied the impact of these variables using the regression study and conclusions were made based on the data analysis. It was found that firm credit ratings are: (1) negatively associated with the number of block holders that own at least a 5% ownership in the firm; (2) positively related to weaker shareholder rights in terms of takeover defenses; (3) positively related to the degree of financial transparency; and (4) positively related to overall board independence, board stock ownership and board expertise and negatively related to CEO power on the board. Findings also suggest that CEOs of weak governance firms garner overcompensation in excess of their share of additional debt costs due to weak governance. The major gap found in this paper is whether these composite ratings are useful determinants of credit ratings. Further future research can also focus on the benefits of governance to equity stakeholders by investigating the relation between governance and firms’ cost of equity capital.

Credit Ratings as Coordination Mechanisms. Arnoud W. A. Boot. Todd T. Milbourn. Anjolein Schmeits. The Review of Financial Studies. Vol. 19 No.1. (2006). In this paper, the authors provide a novel rationale for credit ratings. The rationale that they proposed was that credit ratings serve as a coordinating mechanism in situations where multiple equilibria could be obtained. The authors have developed theorems and corollary with the proof and thereby tried to explain their stand on the fact that credit ratings serve as a coordinating mechanism and several models have been developed to prove the same. Several mathematical models have also been considered. The analysis shows that credit ratings can coordinate investors’ beliefs. Together with the implicit contract and monitoring relationship between the CRA and the firm, ratings have a real impact. The analysis produces several empirically-testable predictions that could be taken to the data, potentially adding to the understanding of the actual credit rating process. The authors have not explored on how the presence and reliance on credit rating agencies by market participants might discourage other monitoring mechanisms, and potentially fuel an excessive dependence on credit rating agencies.

How and Why Credit Rating Agencies are not like other Gatekeepers. Frank Partnoy. (May 2006). SSRN Abstract ID: 900257. The author argues that the optimal policy with respect to credit rating agencies should account for the ways in which agencies differ from other gatekeepers. Various policy proposals have been assessed and it was argued that an ideal policy should both reduce the value of regulatory licenses and increase the threat of rating agency liability. Data from different sources have been collected and an exploratory research has been done on the topic under study. The author then cites evidences from different contexts and concludes his vindictive arguments. Credit rating agencies will continue to present unique difficulties until regulators address the ways in which the agencies differ from other gatekeepers. Credit rating agencies are more profitable than other gatekeepers and at least as subject to conflicts of interest, particularly in the CDO market. They benefit from regulatory licenses and limitations on liability more than other gatekeepers. Use of statistical tools has been identified as a major research gap. Further, no environmental reasons have been considered for arriving at the conclusion.

Credit Ratings and Capital Structure. Darren J. Kisgen. The Journal of Finance.Vol. LXI, No. 3. (June 2006). This paper examines to what extent credit ratings directly affect capital structure decisions. The paper outlines discrete costs (benefits) associated with firm credit rating level differences and tests whether concerns for these costs (benefits) directly affect debt and equity financing decisions. The author collected data and used the main empirical tests to examine the implication by regressing measures of net debt issuance relative to net equity issuance on dummy variables that distinguish between firms near a change in credit rating and those that are not. Hypothesis testing was done using many tests including plus or minus tests, credit scoring tests and final conclusions were made accordingly. This paper contributes to the understanding of capital structure decisions. Managers are concerned about ratings, as observed anecdotally in the press and through survey results. This paper demonstrates that these concerns translate into real economic decision-making consequences. The author has elicited a greater understanding of the capital structure decisions however the variables selected for the study could be expanded for further research and more insights.

Earnings, Cash Flows, and Ex Post Intrinsic Value of Equity. K. R. Subramanyam. Mohan Venkatachalam. The Accounting Review. Vol. 82, No. 2. (2007). The authors intend to reexamine the relative importance of earnings and operating cash flows in equity valuation. The authors are examining the relative ability of earnings and cash flows in explaining ex post intrinsic value of equity. To determine intrinsic value we use the fundamental valuation equation, the dividend discount model (DDM). The authors then computed the intrinsic values for a sample of all available firms in the 2004 Compustat database for the period 1988–2000. Descriptive analysis has been done followed by the correlation and regression study. The conclusions are made thereafter. The authors found that the ex post intrinsic value measures are not completely independent of stock prices, because we use future (three-years-ahead) stock prices when determining terminal values. The superiority of intrinsic value as the predictive criterion applies only when one takes a valuation perspective from the equity investors’ standpoint. The information needs of other users such as creditors or debtors could not be satisfied as it differs from the investors view point. Hence it leaves a greater scope to bridge the information mismatch.

Regression-Based Tests of the Market Pricing of Accounting Numbers: The Mishkin Test and Ordinary Least Squares. Arthur Kraft. Andrew J. Leone. Charles E. Wasley. (May 2007). In this study, the authors demonstrate on how the omitted variables problem affects inferences drawn from the Mishkin Test (MT) in accounting settings, and thus how the MT’s use has likely led to incorrect inferences about the rational pricing of accounting numbers in prior research. The data has been collected using Compustat and CRSP and the variables have been stated. A model has been developed and regression analysis has been done using the two tests- Mishkin Test and Ordinary Least Squares. Since OLS is more easily implemented in standard statistical packages along with traditional diagnostics tests and model corrections, aids in inter-study comparability and avoids potential survivor bias caused using the MT, the authors suggest that accounting researchers consider using OLS or be more explicit about the exact advantages of the MT over OLS in their research settings. The use of OLS in statistical tools has not been validated and it is an inference made which could lead to further research in this direction.

The Economics of Rating Watchlists: Evidence from Rating Changes. Christian Hirsch. Christina E. Bannier. (December 18, 2007). In this paper, the authors intend to scrutinize the additional services, taking rating reviews as an example. Additionally to describing the watch list as a relatively recent rating instrument, the authors analyze its influence on financial markets and, hence, on the rated entities themselves, in order to hint at its economic role. The data collected has been subject to correlation and regression study to analyze the impact on the various variables on the market value and hypotheses have been stated accordingly to back the research study. Various tests have been carried to test the hypotheses and conclusions were made. It was found that indeed after institutionalizing the watchlist process, rating downgrades trigger stronger market reactions than in the pre-watchlist period. Furthermore, our empirical study lends support to the hypothesis that the watchlist procedure allows rating agencies to enter into an implicit contract with the rated firms. The author’s approach is very brief and vague and thus the impacts could be seriously explains using various statistical tools and collecting relevant data.

Credit Ratings and Taxes: The Effect of Book/Tax Differences on Ratings Changes. Benjamin C. Ayers. Stacie K. Laplante. Sean T. McGuire. (January 4, 2008). This paper examines whether credit analysts utilize the information contained in the difference between book and taxable income in analyzing a firm’s credit risk. The data has been collected and test statistics have been done. The authors have identified variables and studied the impact of these variables using the regression study and inferences were made based on that. Sensitivity analysis has been performed to draw major conclusions from the study. The results suggest that credit analysts not only use the information in book-tax differences in setting ratings, but that they are able to "look through" to the source of the book-tax difference when determining a firm’s credit worthiness. This study also suggests that less favorable credit ratings are an additional cost of large book-tax differences. Sensitivity analyses suggest that results are robust to alternative methods of estimating taxable income, providing additional comfort in the inferences that was drawn.

The Mispricing of Earnings Components: New Evidences from Iran. Yasin S. Fazeli. Abbas Aflatooni. International Research Journal of Finance and Economics ISSN 1450-2887 Issue 59 (2010) This paper investigates the mispricing of earnings components in firms listed in Tehran Stock Exchange (TSE). The authors used the 2010 version of Tadbirpardaz (the Iranian database of Tehran Stock Exchange) annual data files (includes 444 firms, 2831 firm-years) and sample all firms in Tehran Stock Exchange between 2002 and 2008 with 20 March fiscal year end with sufficient data available to calculate the variables for every firm-year. Mishkin’s test has been employed and models are being constructed to explain the variables and its impact. This is the full sample that they used for testing research hypotheses. They applied the pooled approach to model estimations. Results report that abnormal accruals are less persistent than normal accruals which in turn, are less persistent than cash from operations. Moreover, the market overestimates the persistence of, and thus overprices, both abnormal and normal accruals, but unlike the results of prior research, the overpricing of normal accruals is more severe. The variables used in the Mishkin test could be expanded so as to study the complete picture on the effect of normal and abnormal accruals.

The Role of Accruals and Cash Flows in Explaining Stock Returns: Evidence from Iranian Companies. Ali Saeedi. Mohammad Ebrahimi. International Review of Business Research Papers. Volume 6. Number 2. Pp. 164 -179. (July 2010). This study examines the role of earnings, cash flows, and firm specific factors (growth opportunities, financial leverage, firm size and transitory of earnings) in explaining stock returns. This paper examines the relative and incremental explanatory power of earnings and cash flows in explaining stock returns in Iran. This research investigates the information content of earnings and cash flows for stock returns using the regression models. This research study the companies listed in TSE. The data needed for calculating research variables are collected manually from firm financial statements and the electronic archival data. The sample used to estimate the models consists of all 1998 to 2008 firms that have data needed for calculating research variables. The results do not indicate that earnings and cash flows are value-relevant in Iran. In addition, earnings and cash flows have no incremental information content for explaining security returns. This finding could be due to, considering other factors in decision making on the stock investment by Iranian investors. Also, it was found that both earnings per share and cash flows are not affected by the moderating effects of firm-specific contextual factors. The results of this study do not provide supports for the view that information provided in financial statements about assets and claims and the changes in them are resulted from the application of accrual accounting, although information about cash flows during a period is also important in Iranian context.

Lessons From The Current Financial Crisis: Should Credit Rating Agencies Be Re-Structured.? Josh Wolfsan. Corinne Crawford. (July, 2010) This paper attempts to address the enormous influence of CRAs on the capital markets. It argues that the securities rating industry should be held to the same professional and ethical standards as the public accounting profession. Using Secondary data, descriptive research has been carried out and the author discloses the information on reforms, proposals in the credit rating arena and thus expressed his learnings from the historical data in a simple theoretical form. The use of information is limited in the research paper. No proper evidences have been cited. The use of tools could have been an added weight to the findings from the research.

The Valuation of Foreign and Domestic Income by Credit Rating Agencies. Sunhwa Choi. (May 2011). The author intends to examine whether credit rating agencies distinguish between foreign and domestic income in their rating decisions. Further, whether credit rating agencies fully incorporate the information in foreign and domestic income about future performance into their ratings has also been considered. Data from different rating agencies have been collected and the variables are stated for the study. Hypotheses have been developed and it has been tested using various empirical tests like Mishkin Test, etc. The data has been computed using Compustat for correlation and regression study. A model have been developed stating the dependent and independent variables. The empirical findings indicate that rating agencies do not distinguish between foreign and domestic income and that rating agencies underestimate foreign income; however, this underestimation of foreign income is significantly reduced after SFAS 131. This paper does not explore the question on why rating agencies do not fully incorporate the information in foreign income into their ratings.

Strategic Role of Credit Rating Agencies on Financial Markets. Tomáš Matyska (2011). The thesis deals with the role of credit rating agencies (CRAs) on financial markets. Also the author aimed at examining the incentives a CRA may have to provide inaccurate estimations of the products. The author used to prove the assumptions and propositions in a step by step manner and tried to extend the findings of Bolton et al. The author in his thesis used the mathematical probability theorems to arrive at the conclusions. The author has replaced the assumption of total naivety of one group of investors with bounded rationality and has also found out that boundedly rational investors create higher incentives for the CRA’s systemic rating inflation than absolutely naive investors. On the other hand, this bounded rationality decreases a loss from shopping for rating.

Credit Rating Agencies: Alternative Rating Mechanisms and Approaches in Consideration of U.S. and European Financial Market Regulations. Mag. Thomas Werth. (Jan, 2012). This paper analyzes three alternatives to the existing credit rating system both on a methodical and an institutional level by means of a dedicated valuation model: (1) Ratings based on market-implied data, (2) Ratings by public credit rating agencies and (3) Ratings by crowdsourcing mechanisms. The author has analyzed the various credit rating mechanisms and using valuation of each rating systems concluded his findings by way of recommendations and suggestions on three different approaches to credit rating. Data from various agencies have been collected and analysis has been done manually. The dependence on credit ratings has – in the author’s opinion – increased dramatically in the last years with consequently blaming credit rating agencies rightly or not for literally any financial crisis. Although it is necessary to distinguish between private, household investors, which are usually worse informed, and corporate, institutional investors, which are usually better informed, it is important to strike out that no financial gatekeeper or intermediate releases the individual investor to carefully review their investment decisions. No use of statistical tools has been a serious gap and that the use of projections and a suitable modeling would have been a greater research.

Do Rating Agencies Fully Understand Information In Earnings And Its Components? Sunhwa Choi. SSRN Abstract ID: 2101608. (June 20, 2012). The contemporaneous relation between credit ratings and earnings and to compare it to the relation between credit ratings and cash flows. It also examines under what circumstances the relation between credit ratings and earnings becomes stronger. Also whether credit rating agencies fully understand the implication of earnings and its components for future performance have been examined. Data on the firms under study have been collected and using Compustat the statistical analysis has been done. Correlation analysis has been done from the Compustat data and regression analysis has been carried out by constructing a model. Several tests such as Ordinary Least Squares, Mishkin Test have been used to test the hypothesis stated. While annual earnings report a firm’s financial performance for a short period (i.e., a year), credit rating agencies’ decision horizon may be longer than a year and thus creating a misalignment of horizon in this study. In addition, the question on why rating agencies do not fully incorporate earnings information is not completely resolved in this study.

Are Credit Ratings Trustworthy? Empirical study on the dependence of corporate defaults to market risk within investment grade and speculative grade range. Stéphane Destraz. Raphaël Lahaye. (2012). In this paper, the authors discuss the gap between what credit ratings are i.e. subjective credit opinions, and how regulators use them as an accurate assessment of a probability of default of an issuer. The data on global corporate defaults, investment grade corporates defaults and speculative grade corporate defaults was obtained directly from Standard & Poor’s. In order to calculate the dependence of corporate defaults to market conditions, the authors used two different measures. Investment and speculative grade bonds were two very different kinds of investments. Investment grade companies display high creditworthiness and business-driven future; their activities are preponderant to evaluate the capacity to pay down the debt. Speculative grade companies have market-driven financial health where random shocks and downward pressure in the overall economy can lead to insolvency. The major research gap found in this paper is that the authors failed to prove their vindictive arguments and are biased to the idea that credit ratings are trustworthy however the other side of credit ratings has been ignored completely.

A Study of the Relationship between Accounting Conservatism and Investment Efficiency in Tehran Stock Exchange. Ali Lalbar. Majid Karamali. Mohammad Hosein Pourmansoor. Mehdi Ghaemmaghami. Journal of Basic and Applied Scientific Research. (2012). The authors intend to study the relationship between accounting conservatism and the firm’s investment efficiency. The spatial scope of this study includes the companies listed in Tehran Stock Exchange. The temporal scope is the period 2005 to 2009. This is a descriptive research, and aimed to be an applied one. The regression analysis is used to test the relationship between variables of the model and to assess the mediating variable. The sampling method is systematic elimination. Findings show that accounting conservatism is associated with an increase in investment efficiency, and the mediating variable Firm Size is positively effective on the relation between accounting conservatism and investment efficiency, whereas the variable Growth Opportunity has no effect on the mentioned relationship. The use of variables is limited and further research can add more variables for the study.

Have Rating Agencies Become More Conservative? Implications for Capital Structure and Debt Pricing. Ramin Baghai, Henri Servaes, and Ane Tamayo. (February 2012) The authors studied the implications of the increased conservatism and shed light on the standards employed by rating agencies. From the Compustat Ratings File, the authors gathered monthly data on debt ratings issued by Standard & Poor’s over the period 1985-2009 for all rated firms. To estimate regression models, they translated the alphanumeric ratings into a numerical scale by adding one for each rating notch. It was found that debt ratings have become more conservative: holding firm characteristics constant, the rating of the average firm declined by three notches. Decline in default rates over time for both investment grade and non-investment grade bonds suggests that ratings have become too stringent over time. Findings also imply that the conflict of interest argument that has been proposed to explain what appeared to be inflated ratings for mortgage backed securities may not apply to corporate bonds. The major gap of the study is to why rating agencies have become more conservative. The authors place an interrogatory conclusion where further research could be explored.

Credit Rating Agencies as Gatekeepers: What Went Wrong? Sulette Lombard. This paper discusses the reasons for the supposed failure of CRAs and examines proposed regulatory reforms to determine whether and how the effectiveness of credit rating agencies as gatekeepers could be increased. The author has done a descriptive review on the regulations and policy framework in respect to three regions namely Australia, US and Europe and a comparative study has been made. The study then focusses on the imperative recommendations on these aspects. The importance and power of CRAs make it essential that regulators ‘get it right’ when addressing concerns regarding the way in which they operate and it is important to ensure that any proposed regulation serves to improve the current system and does not come down to regulation for the mere sake of being seen to do ‘something’. The author is not argumentative in his approach for uniform regulatory measures across the globe as it is not backed by data and implications. Statistical analysis could have been done to augment the stand of the author.

Sovereign Credit Ratings and Their Impact on Recent Financial Crises. Roman Kräussl. This paper tried to shed light on the role of credit rating agencies during the financial turmoil of the 1990s. In particular, it analyzes the impact of the sovereign credit rating downgrades during emerging market crises for the cases of Mexico during the Mexican Peso crisis of 1994/95 and for Korea during the Asian crisis of 1997/98.The author used a multivariate modelling approach and thus resorted to the measure of dynamic interaction between three variables by specification of a vector autoregressive (VAR) system.

The Paradox of Credit Ratings. Frank Partnoy. SSRN Abstract ID: 285162. This paper has attempted to demonstrate that the view of credit rating agencies prospering based on their good character – a reputation for generating credible and accurate information – is not supported by history or economic analysis. The author has attempted to collect data from the databases and using the secondary data, exploratory research has been done and the conclusions are arrived at. The use of statistical tools would have been a better research objective as no evidences and data could be validated. Mere theoretical approach has been a serious gap found in this paper.

Credit Rating Agencies and the Worldwide Credit Crisis: The Limits of Reputation, the Insufficiency of Reform, and a Proposal for Improvement. John Patrick Hunt. SSRN Abstract ID: 1267625 This proposal directly addresses the problem with ratings on novel financial instruments and is more likely to be effective than the SEC’s proposed grab bag of new rules, and is less intrusive than other direct interventions in the rating market. The solution for the problem is assumed and it is compared to the regulatory regimes to arrive at the specific methods of implementation of the reforms on the rating agency. Though the author has made an attempt to arrive at a proposal on how to increase the credibility of the rating agencies, the serious gap is found in the use of tools to support the policy reforms and the use of statistical tools have not been validated.

Demand-Side Gatekeepers in the Market for Home Loans. Susan Block-Lieb. Edward Janger The paper describes need to explore the contours of institutional structure and regulatory options. The authors collected secondary information from various sources and studied the demand side gatekeepers in the home loan market. Several evidences have been cited and the research is mere a descriptive research. The theoretical approach of the authors has left many questions unanswered as they are not supported by data and statistics.

Regulating credit ratings agencies: where to now? This paper reviews current proposals to regulate credit rating agencies. Amadou. N. R. Sy, Deputy Division Chief, IMF. SSRN Abstract ID: 2121537. This paper highlights macro-prudential regulation. The paper argues that any steps to reduce overreliance on ratings should differentiate both according to the size and sophistication of the institution, and the instruments concerned. This study has been done through stress tests of institutions that would be affected by rating downgrades. The author has identified the criteria and mapped with the instruments and several studies have been done to arrive at whether ratings could be used as collateral for investor information or any regulations could be made to improve the situation. The debate on CRAs emphasizes the need to reduce their oligopolistic power and the conflicts of interest inherent to the "issuer-pays" model, and enhance transparency in their operations. Not surprisingly, the types of regulatory proposals are of a micro-prudential nature as this approach is the most suited to address such issues. Not many evidences have been cited and study is not descriptive and hence detailed stress tests would enhance the objective and expand the research horizon.

The Valuation of Earnings and its Components by Credit Rating Agencies. This paper examines whether credit rating agencies fully understand the implication of earnings and its components for future performance. Mishkin (1983) test is widely used in accounting research to test the market efficiency with respect to accounting numbers. To examine whether the rating agencies fully incorporate the information in earnings and its components into their ratings, the author used the OLS which regress future credit rating changes on current earnings and its two components. He has also provided the results of the Mishkin test as well for some analyses to provide further insight. Earnings are more strongly related to credit ratings than cash flows, because accrual-based earnings incorporate bad news early and mitigate timing and matching problems. More interestingly, future rating changes can be predicted using current earnings information. This is evidence that rating agencies underreact to earnings information. While annual earnings report a firm’s financial performance for a short period (i.e., a year), credit rating agencies’ decision horizon may be longer than a year and thus creating a misalignment of horizon in this study. In addition, the question on why rating agencies do not fully incorporate earnings information is not completely resolved in this study.

Likelihood Ratio Tests For Model Selection And Non-Nested Hypotheses. Quang H. Vuong. The main purpose of this paper is to propose some new tests for model selection and non-nested hypotheses. The methodology adopted in this paper is mathematical approach and several theorems have been formulated and proved by the author. The author has identifies significant ratios for the study to prove the corollary and the associated theorems. No Specific tools used as the research comprises of manual modeling and mathematical approach to problem solving. The approach suggested by the authors has the desirable property that it coincides with the usual classical testing approach when the models are nested. It is probabilistic and is based on testing if the competing models are as close to the true distribution against the hypothesis that one model is closer than the other. The research gap in this paper could not be identified as it is beyond the context of my study.

2.3. STUDIES CONDUCTED IN INDIA

Credit Rating Agencies In India: Have We Done Enough? Himanshu Bhushan. SSRN Abstract ID 1999886. The author seeks to review the developments of India with a background of the recent financial crisis. Largely, the emphasis remains on the existing and desired regulatory structure in India. The author has used the secondary information and regulations that exist in India currently. Using the available information, the author has done an exploratory research on the topic and arrived at some conclusions. The SEBI has certainly responded to the alarming call and kept pace with the global trend for reform to the Credit Rating Agency laws. Yet, in line with other jurisdictions, the larger issue of liability of CRA’s in case of failure to rate an instrument properly remains unaddressed. The rating by them is considered an opinion and therefore no liability accrues on them in case of loss incurred by any investor. The author has not used any data to prove his findings and no use of statistics make the research interrogatory.