Cross-Listed Bonds, Information Asymmetry, and Conservatism in Credit Ratings

We propose information asymmetry as an additional explanation for rating conservatism. Because information asymmetry is likely higher for cross-listed bonds than for U.S. bonds, we expect and find that cross-listed bonds are rated more conservatively than U.S. domestic bonds at issuance. Further, cross-listed bonds receive less frequent upgrades and take longer to be upgraded after issuance. Because lower ratings might also reflect higher default risk based on agencies' private information, we conduct additional tests to discriminate between the rating conservatism and private information explanations. The results are consistent with ratings conservatism and inconsistent with the private information explanation.