A Multiple Discriminant Analysis of BHC Commercial Paper Ratings by John W. Peavy III and S. Michael Edgar: A Comment/A Reply

In Peavy and Edgar's (1983) statistical model, the size of the larger issuers seems to overcome significant differences in other variables. The question arises as to whether individual participants in the paper market can evaluate either the degree of risk present in bank holding company (BHC) paper or the validity of the rating agencies' ratings, as long as even basic measures of international risk exposure do not appear in the public record. It appears that more information is needed for BHC paper ratings to be valid. In reply, Peavy and Edgar note that the high degree of correlation between BHC commercial paper ratings and the size of the issuing BHC raises a serious question about the raters' recognition of the international exposure facing many of the large BHCs. The market seems to have realized this problem and so devised more detailed BHC rating categories. The raters also have made widespread downgrades among the largest BHC commercial paper issuers.