We examine data from the mid-1980s to 2003 to investigate whether stock prices set on the Tokyo Stock Exchange for Japanese firms react more strongly to changes in credit ratings of global rating agencies than of local agencies. This offers a strong test of relative influence of the two groups of rating agencies. We hypothesize that global raters will have more influence, but given that the two global agencies, Moody’s and Standard and Poors, are headquartered in the United States, analysis of stocks of Japanese firms listed on US exchanges would confound the results to the extent there is a home bias for raters. We find that global agencies are more influential than the two major local raters, Japan Rating and Investment Information and Japan Credit Rating Agency, for rating downgrades. Thus for credit downgrades, global raters are more influential than local ones even in the local market. Consistent with previous research, we find that upgrades are benign events, and this holds true for global as well as local agencies.

We test the biasedness of unsolicited ratings relative to solicited ratings using the ex post firm performance measured by the long-run stock performance of firms following rating announcements and changes. We find that the announcements of new unsolicited ratings are followed by negative long-run stock performance, while those of new solicited ratings are followed by insignificant long-run stock performance. These results are inconsistent with the conservatism hypothesis that suggests that unsolicited ratings are downward biased. We further demonstrate that firms with solicited upgraded (downgraded) ratings experience subsequent positive (negative) abnormal stock performance, while those with unsolicited rating changes have zero abnormal stock performance. The differential stock performance following rating changes between solicited and unsolicited ratings reflect the differential information carried by each type of rating rather than the biasedness in ratings. Specifically, while solicited ratings are based on both public and private information, unsolicited ratings are mainly based on public information. Overall, we find no evidence for a downward bias in unsolicited ratings.

Many Japanese bond issuers believe that global credit rating agencies (CRAs)—Moody's and S&P—do not consider the unique corporate governance structure in Japan and assign lower credit ratings even though the “main bank” relationship in Japan can significantly reduce the default risk of these companies. Using 5,814 rated corporate bonds issued by 558 non-financial firms in Japan from 2003 to 2021, we find that local CRAs (R&I and JCR) weigh unique Japanese corporate governance features more heavily and assign higher ratings to Japanese corporate bonds relative to global CRAs. Our results further suggest that the degree of rating differences between local and global CRAs for individual issuers results from systematically different assessments of company-specific risk by these CRAs. Our data also reveal that the importance of main bank ties in Japanese corporate governance remains intact in more recent years, contrary to previous findings.