Conclusions

We conducted a global study of the LTRs of nonfinancial firms as determined by S&P for the period 1998–2003. Specifically, we focused on the solicited versus unsolicited ratings and sample-selection bias in the analysis. Unlike the existing literature, we adopted an improved method using Wooldridge's instrumental-variable approach to mitigate the concern of specification errors in Heckman's model. We found that the probability of a firm seeking an LTR is positively related to the size and profitability of the firm, and negatively related to the growth opportunities and debt levels of the firm. The credit rating is positively related to the sovereign rating, size, and profitability of the issuer, and negatively related to the debt ratio of the issuer.

Consistent with the existing literature, we found that there is indeed a sample-selection bias in credit ratings, i.e., the rating decision (the decision to seek an LTR) is not independent of the rating determinants decision. Our findings suggest that the firms with solicited ratings seem to be more profitable, more liquid, and have lower leverage than the issuers with unsolicited ratings. After controlling for sample-selection bias and some key financial ratios, we found that unsolicited firms, on average, seem to have lower LTRs. The findings are consistent with the existing literature and are robust to the full sample and to a subsample of Japanese firms.

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