The Role of Credit Rating Agencies in the European Financial Markets

Friday, April 19, 2019 (All day)
A‐104 (SDSB building, 1st floor)

Public Defence of Dissertation

The Suleman Dawood School of Business (SDSB) is organising the following PhD Dissertation Defence:

The Role of Credit Rating Agencies in the European Financial Markets

By Yasir Riaz, Candidate PhD Management

Dissertation Defence Committee

  • Dr. Choudhry Tanveer Shehzad ‐ Supervisor & Chair
  • Dr. Muhammad Abdur Rahman Malik – Member SDSB
  • Dr. Ummad Mazhar ‐ Member SDSB
  • Dr. Shafay Shamail ‐ Member (LUMS)
  • Dr. Hilal Anwar Butt – External Examiner (IBA Karachi)

The abstract can be viewed below:

Members of the public are invited to attend the proceedings. Please contact

Mr. Umar Amjad
Phone: 042‐ 35608283  
to register. Advance notice is required to gain access to the campus.


This thesis investigates the role of Credit Rating Agencies (CRAs) in European financial markets. Traditional activities of CRAs include information supply, certification, and monitoring services for corporations and rating sovereign debt. Any change in the opinion of CRAs on the sovereign debt has strong implications on the financial markets and the real economy. This thesis contributes to literature by investigating: (i) the effect of sovereign rating and outlook changes on the shape of the sovereign yield curve; (ii) the impact of sovereign rating and outlook changes on stock markets at different levels of business cycle; (iii) the effect of financial liberalization on the growth in sovereign ratings; and (iv) the impact of sovereign rating and outlook instability on the access to credit by firms. In order to properly investigate these research questions, we employ a variety of pertinent statistical and econometric tools as required in every chapter. These techniques include but are not limited to state space modelling, vector autoregressions, maximum likelihood estimations, Kalman filter approach, generalized method of moments, and limited dependent variable methods.
Findings of this thesis reveal, inter alia, that sovereign rating and outlook announcements play an important “confirmation role” in the financial markets; however, the extent of the effect depends on the announcement type, CRA specificity, kind of market and country characteristics. Specifically, the second chapter shows a significant effect of rating downgrades and an insignificant effect of rating upgrades on the sovereign yield curve; however, we observe mixed results for the effect of changes in outlook status of a sovereign country. The third chapter identifies that stock markets react more negatively to rating downgrades in recovery phases and more positively to rating upgrades in the contractionary period. However, we do not find any evidence of a pro-cyclical effect of sovereign rating and outlook change on stock returns. The fourth chapter indicates a positive impact of financial liberalization on sovereign ratings, and we show that we cannot reject the hypothesis that financial stability is independent of financial liberalization. Moreover, we show in this chapter that sovereign ratings tend to be stable and persistent, otherwise. The fifth chapter suggests a significant negative effect of sovereign rating and outlook instability on the access to credit by firms. The last chapter concludes the thesis with implications of these findings for understanding the role of rating agencies in financial markets, policymaking, designing regulations and for investors and firm owners, both in developing and developed economies.