Conservatism in Credit Ratings: A Comparative Study of Time-Varying Credit Rating Standards in Europe and the US, 1997-2023

Sammanfattning: Our paper reveals increased conservatism in credit ratings in both Europe and the US from 1997 to 2023, with the effect stabilizing after the financial crisis. On average, ratings have declined by more than three notches in Europe, signifying that a firm rated AAA in 1997, with constant financial characteristics, would receive a rating of AA- in 2023. In the US, the decline amounts to around two notches. Within Europe, the effect is most pronounced in Southern Europe, while Eastern Europe and Eurasia deviate from this pattern of conservatism. Our study does not find compelling evidence that justifies the observed increase in conservatism, as there is no indication of increased default rates in either region. Additionally, we find that firms more affected by rating conservatism are less leveraged and experience lower sales growth.