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Are Competitive Rating Agencies Efficient?

Author

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  • Bappaditya Mukhopadhyay

    (Bappaditya Mukhopadhyay, India Development Foundation, 316, Qutab Plaza, DLF Phase-I, Gurgaon 122 002, India.)

Abstract

Two very large companies, Moody's and Standard & Poor's, dominate the credit-rating industry. These two companies own around 80 per cent of the market. No other significant major competitors exist, though there are companies that rate local securities in places like China and India. In India, bulk of the ratings done by the two leading rating agencies—CRISIL (S&P majority stakeholder) and ICRA (Moody as the major stakeholder) have more than 80 per cent market share. Is this industry efficient? In this article, we present a simple theoretical model of competitive rating agencies. We establish that competition among rating agencies need not be efficient. We also show that despite price war, a more efficient rating agency will not necessarily drive out the inefficient one.

Suggested Citation

  • Bappaditya Mukhopadhyay, 2009. "Are Competitive Rating Agencies Efficient?," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 8(1), pages 67-85, April.
    • Handle: RePEc:sae:emffin:v:8:y:2009:i:1:p:67-85
    DOI: 10.1177/097265270900800104
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    References listed on IDEAS

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    1. Christoph Kuhner, 2001. "Financial Rating Agencies: Are They Credible? – Insights Into The Reporting Incentives Of Rating Agencies In Times Of Enhanced Systemic Risk," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 53(1), pages 2-26, January.
    2. Millon, Marcia H & Thakor, Anjan V, 1985. "Moral Hazard and Information Sharing: A Model of Financial Information Gathering Agencies," Journal of Finance, American Finance Association, vol. 40(5), pages 1403-1422, December.
    3. Edward I. Altman, 1968. "The Prediction Of Corporate Bankruptcy: A Discriminant Analysis," Journal of Finance, American Finance Association, vol. 23(1), pages 193-194, March.
    4. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    5. Nayar, Nandkumar, 1993. "Asymmetric information, voluntary ratings and the Rating Agency of Malaysia," Pacific-Basin Finance Journal, Elsevier, vol. 1(4), pages 369-380, December.
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