Unsolicited Credit Ratings: Theory and Empirical Evidence

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Abstract
Unsolicited ratings are credit ratings of firms that have not requested rating evaluation and therefore do not pay fees. Accordingly, unsolicited ratings are issued solely by the discretion of rating agencies based on public information. Given the controversy surrounding unsolicited ratings raised by Japanese firms and some studies, we examine whether the market extracts any new information from unsolicited ratings. We find that unsolicited ratings typically are of speculative grade rather than investment grade; induce significant announcement period abnormal returns for downgrades; and have greater impact for speculative-grade ratings than investment-grade ratings. Keiretsu affiliation of Japanese firms does not mitigate the negative market reaction to unsolicited rating downgrades. Our results suggest that high-quality firms signal through solicited ratings while low-quality firms are revealed through unsolicited ratings.