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The ownership of ratings

Faure-Grimaud, Antoine, Peyrache, Eloic and Quesada, Lucia (2007) The ownership of ratings. Discussion paper: Corporate Governance Series 003, 590. Financial Markets Group, London School of Economics and Political Science, London, UK.

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Abstract

A prevalent feature in rating markets is the possibility for the client to hide the outcome of the rating process, after learning that outcome. This paper identifies the optimal contracting arrangement and the circumstances under which simple ownership contracts over ratings implement this optimal solution. We place ourselves in a setting where the decision to obtain a rating is endogenous and where the cost of such a piece of information is a strategic variable (a price) chosen by a rating agency. We then show that clients hiding their ratings can only be an equilibrium outcome if they are su±ciently uncertain of their quality at the time of hiring a certification intermediary and if the decision to get a rating is not observable. For some distribution functions of clients' qualities, a competitive rating market is a necessary condition for this result to obtain. Competition between rating intermediaries will unambiguously lead to less information being revealed in equilibrium.

Item Type: Monograph (Discussion Paper)
Official URL: http://fmg.lse.ac.uk
Additional Information: © 2007 The Authors
Library of Congress subject classification: H Social Sciences > HF Commerce
H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L15 - Information and Product Quality; Standardization and Compatibility
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
D - Microeconomics > D2 - Production and Organizations > D23 - Organizational Behavior; Transaction Costs; Property Rights
G - Financial Economics > G3 - Corporate Finance and Governance > G34 - Mergers; Acquisitions; Restructuring; Corporate Governance
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Collections > LSE Financial Markets Group (FMG) Working Papers
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 590
Date Deposited: 22 Jul 2009 08:26
URL: http://eprints.lse.ac.uk/24485/

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