Nationally Recognized Statistical Rating Organizations and the Promotion of Institutional Myths

• In Event: 161 - Section on Organizations, Occupation and Work Roundtable Session (one-hour).
  In Refereed Roundtable: Table 08. Institutional Isomorphism and Decoupling

Abstract

Scholars claim that nationally recognized statistical rating organizations (NRSROs) have gained extensive power over capital flows in financial markets during the last half century (Kerwer, 2002; King & Sinclair, 2003; Thomas, 2004; Sinclair, 2005; Altman, 2010). With this power comes the opportunity to influence major social actors such as large corporations and governments. This is problematic for many reasons, one of which being that these agencies may be promoting institutional myths about best practices to the entities that they are sanctioning with credit ratings. I argue that the high level of uncertainty present in the bond rating industry and the lack of accountability that comes from the concentration of power into the hands of only a few rating agencies creates an environment in which institutional myths about best practices inform rating decisions. This research examines organizational practices that are promoted by major corporate bond rating agencies as being tied to firm creditworthiness. An ordered probit model tests which forms of the identified practices are positively sanctioned with higher ratings. Finally, a Heckman selection model is used to determine if engaging in the organizational practices promoted and sanctioned by the rating agencies is significantly related to firm default and future firm performance. I find that three types of practices promoted and sanctioned by NRSROs are not statistically correlated to default or performance suggesting that NRSROs are promoting and sanctioning institutional myths.

Author

• Jacob Apkarian, University of California-Riverside