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Debt Issuer: Credit Rating Agency Relations and the Trinity of Solicitude: An Empirical Study of the Role of Commitment

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Abstract

Interest in credit ratings agencies and their role in financial markets is at an all-time high. Concerns about a lack of transparency concerning process, conflicts of interest, and limited competition are frequently discussed by politicians, regulators and other commentators. These issues we term the credit ratings agency (CRA) trinity of solicitude. We shed some light on this trinity by considering the unique relationship that exists between corporate borrowers (debt issuers) and the CRAs they engage to rate their securities. The exchange relationships literature is used to create a model where commitment plays a central role. Technical qualities, relationship qualities and dependence are theorised as antecedents of commitment, which is described by two constructs of affective commitment and calculative commitment. The issuer’s intention to remain with the CRA, their loyalty, is the consequence of commitment. The model is operationalized by means of a survey questionnaire administered to issuers of corporate debt in the United Kingdom. As expected, perceptions of the quality of the relationship and affective commitment play an important role in CRA-issuer relations. However, contrary to expectations, the technical quality of the rating and issuer dependence on the CRA play little role in determining commitment and continuance. The implications of these findings are discussed along with areas for future research.

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Notes

  1. S&P and Moody’s account for 80 % of the market share. Fitch, the third largest CRA only accounts for 15 % (Langohr and Langohr 2008).

  2. A fourth criticism is sometimes leveled at the ratings industry, namely the competence of CRAs. However, this criticism was most apparent at the time of the subprime bond crisis where rapid growth, and subsequent failure, of the structured finance market—using ratings labels akin the regular corporate and sovereign bonds—resulting in significant censure and reputational loss for CRAs. However, in the mainstream corporate and sovereign bond markets CRAs have a longstanding track record of accurately predicting the probability of failure (see Langohr and Langohr 2008, pp. 307–351 for a comprehensive analysis of the performance of credit ratings).

  3. Newspapers are often cited as an example of a two-sided market that brings together readers and advertisers who may be charged in varying proportions. At one end of the continuum, local or metropolitan ‘free sheets’ do not charge readers but rely on advertising alone. At the other extreme, readers pay for a publication consisting of a wide variety of private listings where the advertiser pays no fee.

  4. Such commentary has also been applied to other gatekeepers such as auditors engaged on investment bank audits where the risks associated with some activities make them un-auditable in the views of some commentators.

  5. The ratings process is not a one-off event. Beyond the initial rating the probability of default on the security is monitored and the rating changed (upgraded or downgraded) as deemed appropriate.

  6. Multinational businesses may seek to issue debt wherever they believe there is the greatest appetite for the issue. Depending on the profile of the organisation this may be outside the UK.

  7. To test for response bias, a comparison was applied to early (first 33 %) and late (last 33 %) of respondents using the Wilcoxon–Mann–Whitney non-parametric test. This assumes late respondents are similar to non-respondents (Dillman 1978). Statistically significant differences between early and late respondents were fund for only one item (α = .05).

  8. A number of authors (Hu and Bentler 1998; Marsh et al. 1998; Hu and Bentler 1999) warn against the use of more common goodness-of-fit indices such as the goodness-of-fit index (GFI) and adjusted goodness-of-fit index (AGFI) which are widely used in the structural equation modelling literature. Hu and Bentler (1999, p. 26) indicate for samples N < 500, the combinational rule SRMR < .11 and RMSEA < .08 is “extremely sensitive in detecting model with misspecified factor covariances”.

  9. Some alternatives were considered to the hypothesised model including tests for mediation of Affective Commitment and Calculative Commitment on Dependence and Continuation as a direct effect on Continuation. Bootstrapping, per the recommendations of Chung and Lau (2009), identifies that Affective Commitment and Calculative Commitment have a net mediated effect on Continuation.

  10. The discriminant validity of: (i) technical qualities versus relationship qualities; and (ii) dependence and calculative commitment by setting the correlation to zero and comparing it to a model where this was not constrained (Segars 1997). The findings: (i) Δχ 2 = .407, 1 d.f. p < .001; and (ii) Δχ 2 = .404, 1 d.f. p < .001); respectively suggest each are distinct constructs.

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Authors and Affiliations

  1. Management Centre, University of the West of Scotland, Craigie House, Craigie Park, Ayr, KA8 0SS, UK

    Angus Duff

  2. Business School, Oxford Brookes University, Wheatley Campus, Oxford, OX33 1HX, UK

    Sandra Einig

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Correspondence to Angus Duff.

Appendix

Appendix

Measures

A Note on Scale Development

Initially, three additional factors were hypothesized: (i) Normative commitment measuring to which degree issuers felt morally obliged to remain with their CRAs; (ii) Opportunistic behaviour measuring to what extent issuers behave opportunistically and try to find better alternatives or use the existence of other CRAs to negotiate more favourable terms; and (iii) additional CRAs measuring what factors would cause issuers to engage additional CRAs. However, these scales failed to achieve acceptable levels of internal consistency reliability (α < .6) and were thus removed from the model. Some of the items relating to these scales could be successfully included in other constructs; the remaining items were deleted from the model.

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Duff, A., Einig, S. Debt Issuer: Credit Rating Agency Relations and the Trinity of Solicitude: An Empirical Study of the Role of Commitment. J Bus Ethics 129, 553–569 (2015). https://doi.org/10.1007/s10551-014-2175-y

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