UC Riverside

This research draws on neo-institutional theories to examine how the power of major bond rating agencies affects the corporate credit rating process. Specifically, it analyzes the extent to which major corporate bond rating agencies encourage engagement in normative practices by corporate firms through the bond rating process. Contrary to initial hypotheses, bond rating agencies discourage firm emphasis on core competencies, shareholder value, and financialization, despite the popularity of these practices in the corporate sector. Additionally, the research finds that the high level of uncertainty and concentration of power that characterize the bond rating industry create an environment in which institutional myths about best practices contribute to rating decisions. Statistical models suggest that specific organizational forms and practices are rewarded by bond rating agencies regardless of their impact on firm health or default. Finally, this research examines how major rating agencies responded to mounting criticism of the financial rating industry using content analysis of 164 bond rating documents published by the two largest bond rating agencies (Moody's and Standard & Poor's), participant observation at a corporate credit rating workshop conducted by one of these major rating agencies, and statistical analysis. Findings demonstrate that bond rating agencies engage in impression management to bolster their claims to legitimacy, and this has ultimately led to a change in the rating process as they increasingly embrace the performance of objectivity. Statistical models demonstrate that in the interest of legitimacy, these powerful social actors have reduced the role of less reliably measured indicators of credit risk in the rating process which has ultimately undermined their unique contributions to the industry.