The Impact of Beliefs on Credit Markets: Evidence from Rating Agencies


We analyze the impact of rating agencies’ beliefs on credit markets. We measure their beliefs as the difference between their forecasts of aggregate credit spreads and the consensus. When rating agencies become more optimistic, they issue higher ratings even though their forecasts do not predict future credit spreads. This optimism leads to lower initial bond yields and subsequent negative excess returns. Firms respond by increasing their leverage and investment. Finally, rating agencies become more optimistic as their head economists’ property values increase. Our analysis shows how subjective beliefs drive aggregate financing and investment through mispricing in credit markets.


Notre Dame, McGill, Peking University, SUFE, CICF 2022, AsianFA 2022, Office of the Comptroller of the Currency, Chinese University of Hong Kong, Shenzhen, University of Georgia, Boulder Summer Conference on Consumer Financial Decision Making, NFA 2023, AFA 2024, MFA 2024