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Divergence in credit ratings

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  • Rablen, Matthew D.

Abstract

During the recent credit crisis credit rating agencies (CRAs) became increasingly lax in their rating of structured products, yet increasingly stringent in their rating of corporate bonds. We examine a model in which a CRA operates in both the market for structured products and for corporate debt, and shares a common reputation across the two markets. We find that, as a CRA’s reputation becomes good enough, it can be optimal for it to inflate its ratings with probability one in the structured products market, but inflate its ratings with probability zero in the corporate bond market.

Suggested Citation

  • Rablen, Matthew D., 2013. "Divergence in credit ratings," Finance Research Letters, Elsevier, vol. 10(1), pages 12-16.
    • Handle: RePEc:eee:finlet:v:10:y:2013:i:1:p:12-16
    DOI: 10.1016/j.frl.2012.11.001
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    References listed on IDEAS

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    1. Mathis, Jérôme & McAndrews, James & Rochet, Jean-Charles, 2009. "Rating the raters: Are reputation concerns powerful enough to discipline rating agencies?," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 657-674, July.
    2. Jie He & Jun Qian & Philip E. Strahan, 2011. "Credit Ratings and the Evolution of the Mortgage-Backed Securities Market," American Economic Review, American Economic Association, vol. 101(3), pages 131-135, May.
    3. Marshall E. Blume & Felix Lim & A. Craig MacKinlay, "undated". "The Declining Credit Quality of US Corporate Debt: Myth or Reality?," Rodney L. White Center for Financial Research Working Papers 3-98, Wharton School Rodney L. White Center for Financial Research.
    4. Mariano, Beatriz, 2012. "Market power and reputational concerns in the ratings industry," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1616-1626.
    5. repec:bla:jfinan:v:53:y:1998:i:4:p:1389-1413 is not listed on IDEAS
    6. Lawrence J. White, 2010. "Markets: The Credit Rating Agencies," Journal of Economic Perspectives, American Economic Association, vol. 24(2), pages 211-226, Spring.
    7. Daniel M. Covitz & Paul Harrison, 2003. "Testing conflicts of interest at bond rating agencies with market anticipation: evidence that reputation incentives dominate," Finance and Economics Discussion Series 2003-68, Board of Governors of the Federal Reserve System (U.S.).
    8. repec:fth:pennfi:67 is not listed on IDEAS
    9. Ramin P. Baghai & Henri Servaes & Ane Tamayo, 2014. "Have Rating Agencies Become More Conservative? Implications for Capital Structure and Debt Pricing," Journal of Finance, American Finance Association, vol. 69(5), pages 1961-2005, October.
    10. Marshall E. Blume & Felix Lim & A. Craig MacKinlay, "undated". "The Declining Credit Quality of US Corporate Debt: Myth or Reality?," Rodney L. White Center for Financial Research Working Papers 03-98, Wharton School Rodney L. White Center for Financial Research.
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    Cited by:

    1. Ozerturk, Saltuk, 2014. "Upfront versus rating contingent fees: Implications for rating quality," Finance Research Letters, Elsevier, vol. 11(2), pages 91-103.
    2. Marta Allegra Ronchetti, 2018. "What if I knew you did it? An analysis of preliminary ratings’ disclosure under competition," Discussion Papers 2018/09, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    3. Vincent Fromentin & Christine Louargant, 2014. "Is the rating given to a European mutual fund a good indicator of its future performance?," Economics Bulletin, AccessEcon, vol. 34(2), pages 1235-1246.
    4. Marta Allegra Ronchetti, 2015. "Credit Rating Agency, Preliminary Ratings and Contact Disclosure," Discussion Papers 2015/04, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    5. Marta Allegra Ronchetti, 2018. "Preliminary credit ratings and contact disclosure," Discussion Papers 2018/02, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    6. Kittiphod Charoontham & Thunyarat Amornpetchkul, 2023. "Compensation reform analysis on inflated credit rating attenuation," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 50(3), pages 627-645, September.
    7. Balios, Dimitris & Thomadakis, Stavros & Tsipouri, Lena, 2016. "Credit rating model development: An ordered analysis based on accounting data," Research in International Business and Finance, Elsevier, vol. 38(C), pages 122-136.

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    More about this item

    Keywords

    Reputation; Spillovers; Divergence; Rating agencies;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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