An Analysis of the Stability and Accuracy of Moody's Bond Ratings and Stock Pricing during the US Great Depression
This study analyses Moody’s railroad bond ratings and stock pricing from 1925 through 1933 and takes several approaches in examining the accuracy and stability of the bond ratings and stock pricing. This approach has not been constructed in previous research and should be considered extremely relevant in today’s financial environment. This paper will reflect accuracy by comparing ratings with a structural model of default—using equity prices to determine if defaults should have been recognized. Stability will use an ordinal regression cross-sectional analysis over the years 1925–1933 to examine the stability of the coefficient estimates over time, and to examine the impact of judgment, estimated as residuals to the regression analysis, on the ratings process as it adapted to the depression conditions. Thus, the coefficients will validate whether the ratings were stable during these years. The judgment aspects of these rating were based in part on the private information from John Moody’s own personal views of the railroads management. The data consists of railroad bond ratings and stock pricing between 1925 and 1933. Various tests are conducted to validate the content of Moody’s ratings including a transition matrix analysis as well as a structural default analysis. This study will present argument as to whether Moody’s ratings provide accurate and stable information for issuers and investors or if their data lagged behind information available at the time of the “Great Depression”. This study includes detailed rating and pricing analysis for railroad bond ratings and stock pricing from 1925 through 1933 obtained through the original Moody Railroad manuals and Wharton Research Data Services. Additionally, findings from the “National Bureau of Economic Research” are presented to assist in illustrating the picture of the fiscal environment during this period.
Donnellan, John T, "An Analysis of the Stability and Accuracy of Moody's Bond Ratings and Stock Pricing during the US Great Depression" (2013). ETD Collection for Pace University. AAI13419532.
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