Mariano, Beatriz (2008) Do reputational concerns lead to reliable ratings? Discussion paper, 613. Financial Markets Group, London School of Economics and Political Science, London, UK.
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This paper examines to what extent reputational concerns give rating agencies incentives to reveal information. It demonstrates that, in a simple model in which a rating agency has public and private information about a project, it may ignore private information and even contradict public information in an attempt to minimize reputational costs. A monopolistic agency can act conservatively by issuing too many bad ratings when a project is expected to be good based on private and public information. In a competitive setting, an agency becomes bolder and can issue too many good ratings when a project is expected to be bad based on private and public information. The paper provides a reason for why competition in the ratings industry might lead to overly optimistic ratings even in the absence of conflicts of interest.
|Item Type:||Monograph (Discussion Paper)|
|Additional Information:||© 2008 The Author|
|Uncontrolled Keywords:||Reputation, Rating agencies, Competition, Conformism, Conservatism, Boldness.|
|Library of Congress subject classification:||H Social Sciences > HB Economic Theory|
|Journal of Economic Literature Classification System:||G - Financial Economics > G1 - General Financial Markets
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
G - Financial Economics > G2 - Financial Institutions and Services > G24 - Investment Banking; Venture Capital; Brokerage; Rating Agencies
|Sets:||Research centres and groups > Financial Markets Group (FMG)
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