Credit rating and competition

Camanho-Da-Costa-Neto, Nelson, Deb, Pragyan and Liu, Zijun (2010) Credit rating and competition. Financial Markets Group Discussion Papers (653). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

In principle, credit rating agencies are supposed to be impartial observers that bridge the gap between private information of issuers and the information available to the wider pool of investors. However, since the 1970s, rating agencies have relied on an issuer-pay model, creating a conflict of interest - the largest source of income for the rating agencies are the fees paid by the issuers the rating agencies are supposed to impartially rate. In this paper, we explore the trade-off between reputation and fees and find that relative to monopoly, rating agencies are more prone to inflate ratings under competition, resulting in lower expected welfare. Our results suggest that more competition by itself is undesirable under the current issuer-pay model and will do little to resolve the conflict of interest problem.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2010 The Authors
Divisions:	Finance
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games D - Microeconomics > D4 - Market Structure and Pricing > D43 - Oligopoly and Other Forms of Market Imperfection D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search; Learning; Information and Knowledge; Communication; Belief G - Financial Economics > G2 - Financial Institutions and Services > G24 - Investment Banking; Venture Capital; Brokerage; Rating Agencies
Date Deposited:	29 Jun 2023 14:00
Last Modified:	14 Sep 2024 04:32
URI:	http://eprints.lse.ac.uk/id/eprint/119087

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