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Credit Rating Inflation: Is It Still Relevant and Who Prices It?

Author

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  • Herpfer, Christoph
  • Maturana, Gonzalo

Abstract

Credit rating agencies (CRAs) are less likely and slower to downgrade firms with performance sensitive debt (PSD) if these downgrades increase borrowing costs. This effect is not driven by selection into PSD contracts, borrowers hiding information from CRAs, or by firms about to lose their investment grade classification. Moreover, originating banks seem aware of the CRAs' conflicts of interest, and sell loans with more embedded conflicts more frequently. In contrast, secondary market participants do not price conflicts of interest to the same extent. The recent settlements between the major CRAs and the U.S. government do not appear to prevent credit inflation.

Suggested Citation

  • Herpfer, Christoph & Maturana, Gonzalo, 2020. "Credit Rating Inflation: Is It Still Relevant and Who Prices It?," MPRA Paper 109461, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:109461
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    File URL: https://mpra.ub.uni-muenchen.de/109461/1/MPRA_paper_109461.pdf
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    References listed on IDEAS

    as
    1. Tim R. Adam & Valentin Burg & Tobias Scheinert & Daniel Streitz, 2020. "Managerial Biases and Debt Contract Design: The Case of Syndicated Loans," Management Science, INFORMS, vol. 66(1), pages 352-375, January.
    2. Adam, Tim R. & Streitz, Daniel, 2016. "Hold-up and the use of performance-sensitive debt," Journal of Financial Intermediation, Elsevier, vol. 26(C), pages 47-67.
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    More about this item

    Keywords

    Credit ratings; performance-sensitive debt; rating catering;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G1 - Financial Economics - - General Financial Markets
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G3 - Financial Economics - - Corporate Finance and Governance

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