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The Journal of Fixed Income

The Journal of Fixed Income

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Primary Article

The Use of Credit Ratings in Investment Management in the U.S. and Europe

Richard Cantor, Owain Ap Gwilym and Stephen H Thomas
The Journal of Fixed Income Fall 2007, 17 (2) 13-26; DOI: https://doi.org/10.3905/jfi.2007.695282
Richard Cantor
A managing director at Moody's Investors Service in New York, NY. richard.cantor@moodys.com
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Owain Ap Gwilym
Professor of finance at the School of Management & Business, University of Wales in Aberystwyth, U.K. oma@aber.ac.uk
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Stephen H Thomas
Professor of finance at the Cass Business School, City University in London, U.K. s.h.thomas@city.ac.uk
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Abstract

We analyse a survey of 200 plan sponsors and investment managers in the US and Europe regarding the use of credit rating guidelines in the conduct of their investment activities. We find that ratings-based guidelines are widespread, but their forms and motivations vary considerably. The usage of ratings appears remarkably similar in the US and Europe. The adoption of ratings-based investment guidelines appears driven by the private sector, with regulation playing a relatively minor role. Guidelines generally reference ratings of specific agencies, rather than the ratings of all officially “recognized” agencies. Ratings-based guidelines seem unlikely to destabilize markets because although asset retention guidelines are common, rapid forced selling upon downgrades is not. Market participants express a preference on the margin for more accuracy over more stability, but stability is valued and guidelines rarely include agency outlook designations, which could be used to increase rating accuracy. These findings generally support the hypothesis presented in Cantor [2004] that ratings are used as governance tools by market participants to ameliorate principal-agent problems between asset managers and their clients.

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The Journal of Fixed Income
Vol. 17, Issue 2
Fall 2007
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The Use of Credit Ratings in Investment Management in the U.S. and Europe
Richard Cantor, Owain Ap Gwilym, Stephen H Thomas
The Journal of Fixed Income Sep 2007, 17 (2) 13-26; DOI: 10.3905/jfi.2007.695282

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The Use of Credit Ratings in Investment Management in the U.S. and Europe
Richard Cantor, Owain Ap Gwilym, Stephen H Thomas
The Journal of Fixed Income Sep 2007, 17 (2) 13-26; DOI: 10.3905/jfi.2007.695282
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