Do Unsolicited Ratings Contain a Strategic Rating Component? Evidence from S&P,” Working Paper

This paper examines why, for non-U.S. firms, unsolicited ratings tend to be lower than solicited ratings. Both adverse selection and “strategic rating ” argu-ments such as agency conservatism or blackmailing may be reasonable explana-tions. Comparing empirical default rates of firms with solicited and unsolicited S&P ratings between January 1996 and December 2006, we cannot reject the ad-verse selection hypothesis for the total sample. However, focussing on the more opaque sub-sample of banks we find that strategic rating seems to play an impor-tant role. Our results are robust to various additional tests, including CreditWatch and outlook information, the use of different default horizons, and of alternative outcome measures. JEL Classification: G15, G2