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The Use of Credit Ratings in the Delegated Management of Fixed Income Assets

Author

Listed:
  • Ramin P. Baghai

    (Stockholm School of Economics, SE-113 83 Stockholm, Sweden; European Corporate Governance Institute, 1000 Brussels, Belgium; Centre for Economic Policy Research, London EC1V 0DX, United Kingdom)

  • Bo Becker

    (Stockholm School of Economics, SE-113 83 Stockholm, Sweden; European Corporate Governance Institute, 1000 Brussels, Belgium; Centre for Economic Policy Research, London EC1V 0DX, United Kingdom)

  • Stefan Pitschner

    (CUNY Queens College Business School, Queens, New York 11367)

Abstract

Investment mandates of fixed income funds constrain managers’ portfolio decisions, often employing credit ratings to classify asset risk. We categorize U.S. and European fixed income funds’ mandates using textual analysis and measure the use of ratings. Over the past two decades, despite the weaknesses of ratings revealed in the global financial crisis, ratings use has increased significantly. Since 2010, the fraction of funds not using ratings in any way has fallen by almost half in both the United States and Europe. By 2020, 94% of U.S. funds and 65% of European funds used ratings. These patterns fit agency-based models of investment mandates and point to a lack of practically useful alternatives.

Suggested Citation

  • Ramin P. Baghai & Bo Becker & Stefan Pitschner, 2024. "The Use of Credit Ratings in the Delegated Management of Fixed Income Assets," Management Science, INFORMS, vol. 70(5), pages 3059-3079, May.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:5:p:3059-3079
    DOI: 10.1287/mnsc.2023.4848
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