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Reputations and credit ratings: evidence from commercial mortgage-backed securities

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  • Baghai, Ramin
  • Becker, Bo

Abstract

How do changes in a rating agency’s reputation affect the ratings market? We study the dynamics of credit ratings after Standard & Poor’s (S&P) was shut out of a large segment of the commercial mortgage-backed securities (CMBS) ratings market following a procedural mistake. Exploiting the fact that most CMBS securities have ratings from multiple agencies, we show that S&P subsequently eased its standards compared to other raters. This coincided with a partial recovery in the number of deals S&P was hired to rate. Our findings are consistent with the view that an agency can regain market share after suffering reputational damage by issuing more optimistic ratings.

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  • Baghai, Ramin & Becker, Bo, 2018. "Reputations and credit ratings: evidence from commercial mortgage-backed securities," CEPR Discussion Papers 12648, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12648
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    Cited by:

    1. Josephson, Jens & Shapiro, Joel, 2020. "Credit ratings and structured finance," Journal of Financial Intermediation, Elsevier, vol. 41(C).
    2. Vink, Dennis & Nawas, Mike & van Breemen, Vivian, 2021. "Security design and credit rating risk in the CLO market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    3. Vink, Dennis & Nawas, Mike & van Breemen, Vivian, 2021. "Security design and credit rating risk in the CLO market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    4. Dong, Yi & Hou, Qiannan & Ni, Chenkai, 2021. "Implicit government guarantees and credit ratings," Journal of Corporate Finance, Elsevier, vol. 69(C).
    5. Baghai, Ramin & Becker, Bo & Pitschner, Stefan, 2018. "The Private Use of Credit Ratings: Evidence from Mutual Fund Investment Mandates," CEPR Discussion Papers 13418, C.E.P.R. Discussion Papers.
    6. Li, Zhe & Liang, Shuguang & Pan, Xianyou & Pang, Meng, 2024. "Credit risk prediction based on loan profit: Evidence from Chinese SMEs," Research in International Business and Finance, Elsevier, vol. 67(PA).
    7. Hung, Mingyi & Kraft, Pepa & Wang, Shiheng & Yu, Gwen, 2022. "Market power and credit rating standards: Global evidence," Journal of Accounting and Economics, Elsevier, vol. 73(2).
    8. Vu, Huong & Alsakka, Rasha & ap Gwilym, Owain, 2022. "Does competition improve sovereign credit rating quality?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 76(C).
    9. Wasi, Md Abdul & Pham, Thu Phuong & Zurbruegg, Ralf, 2021. "The non-pecuniary determinants of sovereign and bank rating changes," Finance Research Letters, Elsevier, vol. 41(C).
    10. Alessio Piccolo & Joel Shapiro, 2022. "Credit Ratings and Market Information," The Review of Financial Studies, Society for Financial Studies, vol. 35(10), pages 4425-4473.
    11. Xing Liu & Lingxuan Yang & Yu Liu, 2023. "Does reputation matter? Evidence on spatial competition in China's bond market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(S1), pages 1533-1570, April.
    12. Samuel B. Bonsall & Kevin Koharki & Pepa Kraft & Karl A. Muller & Anywhere Sikochi, 2023. "Do Rating Agencies Behave Defensively for Higher Risk Issuers?," Management Science, INFORMS, vol. 69(8), pages 4864-4887, August.
    13. Jones, Laurence & Alsakka, Rasha & ap Gwilym, Owain & Mantovan, Noemi, 2022. "Regulating rating agencies: A conservative behavioural change," Journal of Financial Stability, Elsevier, vol. 60(C).
    14. Anna Bayona & Oana Peia & Razvan Vlahu, 2023. "Credit Ratings and Investments," Working Papers 776, DNB.
    15. 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.

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    More about this item

    Keywords

    Credit ratings; Reputation; Competition; Information quality; Commercial mortgage-backed securities;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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