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The Ownership of Ratings

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  • Faure-Grimaud, Antoine
  • Peyrache, Eloïc
  • Quesada, Lucía

Abstract

Standard & Poor's provides corporate governance ratings to firms who can, upon learning those, decide to reveal them or not to the market. This paper identifies the circumstances under which such a simple ownership contract over ratings can emerge as the optimal arrangement. Firms hiding their ratings can only be an equilibrium outcome if they are sufficiently uncertain of their quality at the time of hiring a certification intermediary and if the decision to get a rating is not observable. For some distribution functions of firms' qualities, a competitive market is a necessary condition for this result to obtain. Competition between rating intermediaries will unambiguously lead to less information being revealed in equilibrium.

Suggested Citation

  • Faure-Grimaud, Antoine & Peyrache, Eloïc & Quesada, Lucía, 2005. "The Ownership of Ratings," CEPR Discussion Papers 5432, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:5432
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    More about this item

    Keywords

    Certification; Corporate governance;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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