Paper Title
A Study of Ratings Changes at The Margin of Investment and Speculative Grades

Abstract
These High-profile bankruptcies in investment grade firms and/or CDOs being given high ratings just before they collapsed have led to concerns about the rating agencies’ apparent lack of timeliness in rendering downgrade decisions. One possible cause of such delays is that rating agencies coddle their clients to retain business. We examine small ratings downgrades (upgrades) in firms at the margin of investment (speculative) grade compared to those in adjacent firms of the same grade. In contrast to the concerns expressed above, we find little evidence of transparent coddling behavior involving downgrades in marginal investment grade firms with fundamental risk factors such as operating performance, leverage and size. However, speculative grade firms appear to receive ‘favorable’ treatment with respect to operating performance and size. In addition, we find unexplained upgrades in these firms after controlling for primary ratings factors. Index Terms - Bond rating, coddling, downgrade, speculative grade, upgrade