Research Paper Review

Business Research
Management

How do credit rating

agencies rate firms from
Developing Countries?

Submitted by:
Arpit Chugh
2016PGP073
PGP 2016-2017
Contents
Purpose clearly defined:................................................................................................2
Research process detailed:...........................................................................................2
Research design thoroughly planned:...........................................................................2
High ethical standards applied:....................................................................................2
Limitations frankly revealed:.........................................................................................3
Adequate analysis for decision-makers needs:............................................................3
Findings presented unambiguously:..............................................................................3
Conclusions justified:....................................................................................................3
Researchers experience reflected:...............................................................................3
Final verdict...................................................................................................................3

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 MORE ANALYSTS, BETTER RATINGS:
DO RATING AGENCIES INVEST
ENOUGH IN LESS DEVELOPED
COUNTRIES?
GIOVANNI FERRI, 2003

Purpose clearly defined:

The purpose of the research is clearly defined in the beginning of the research. The
author identifies a problem, then make a conjecture explaining the reason for that
problem. Then he uses his research technique and his findings prove in the end that
the conjecture was indeed right.

The objective of the theory is to test the theory whether increased efforts by CRAs
(Credit Rating Agencies) has any effect on a firms or sovereigns rating in both OECD
and non-OECD countries. The focus of the research is on underinvestment on the
part of CRAs.

Research process detailed:

The author has explained the research process in the introduction part of the
research paper. The data collected is secondary in nature and the author has defined
all the variables that he has used in testing his hypothesis. Author has also
mentioned that he has sampled 564 firms from 90 countries.

Hence, even before reading the research part, the reader was able to know the
research process in detail

Research design thoroughly planned:

The author has clearly explained the research process, data collection method and
variables used. The regression technique used is Ordinary Least square regression.
Also, the author has quantified the efforts made by a CRA on a firm by issuers
allocated units of analysts (UNIANA). Higher the UNIANA, higher the effort by CRA to
rate that firm/sovereign. Apart from that, other indicators like GDP, population and
distance from USA (dummy variable) is used.

High ethical standards applied:

The author has properly cited whenever he has referred to any past research. He had
provided a full list of all the research paper he has referred to. Also, while making
conjectures, he has cited the source at each and every point.

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The author was also careful enough to not reveal the names of sovereigns and firms
for which the data was collected from Moodys website. Hence, I believe that author
has applied high ethical standards of research.

Limitations frankly revealed:

There are two footnotes that reveal the limitation of the research. Hence, author will
be given full credit for revealing the limitations frankly.

Footnote 1 reveals that the kind of data which the author used must have been
extracted from S&Ps database. However, only Moodys data was publicly available.
Hence, more research can be done using S&Ps data.

Footnote 4 reveals that each analyst at Moodys differ in capability and effort.
However, since it cannot be measured adequately by and external agency, the
author has assumed that all the analysts are of equal capability. This is also one
limitation of the research.

Adequate analysis for decision-makers needs:

The author has made adequate analysis of the finding of the research.

The conclusion the preceding part has made it very easy for the decision makers to
get a grasp of the research paper without understanding the research process and
design in detail. This is a mark of good research paper. The research process can be
complicated; however, the findings must be explained in simple manner
understandable to a layman. The author has done exactly the same. The findings are
presented below.

The author has tried to find the reason for the statement that rating agencies track
record is good in developed countries but poor in emerging economies. Given the
almost-monopolistic structure of the industry, author conjectures that agencies
might underinvest in information gathering. He proposes an indicator quantifying the
agencies effort to gather information and assess whether greater effort affects
rating levels.

Findings presented unambiguously:

The findings of the research are clearly stated t thee end of the article. There are
basically two findings in the research.

There is absolute underinvestment on sovereign issuers from LDCs, i.e. rating

agencies effort is smaller there than in developed countries. Also, there is relative
underinvestment on non-financial firms from LDCs, i.e. despite a larger rating effort
on firms in LDCs than in firms in developed countries, the ratings of the latter
decrease with effort while those of the former do not and sometimes even increase

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Conclusions justified:
Author has justified the conclusion by stating that CRAs performance in developing
countries is poor because they spend less effort in gathering the data about the firms
from less developing countries. The findings of the research raise an important policy
issue. Incentives should be devised to induce rating agencies to increase their effort
in less developed countries. Otherwise, the distortion deriving from their
underinvestment could prove an obstacle to LDCs access to global financial
markets.

Hence author has made an effort to justify the conclusions.

Researchers experience reflected:

The author has vast experience in the economics and finance field and it was visible
from the article. He has experience with various big financial institutions like World
Bank and Asian Development Bank.

Final verdict
Based on all the aforementioned parameters, although there is some slight scope of
further improvement in the research article, I would say that this is indeed a good
research article.