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Competition in the Credit Rating Industry: Benefits for Investors and Issuers

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  • Morkoetter, Stefan
  • Stebler, Roman
  • Westerfeld, Simone

Abstract

We empirically investigate the benefits of multiple ratings not only at issuance of debt instruments but also during the subsequent monitoring phase. Using a record of monthly credit rating migration data on all U.S. residential mortgage-backed securities rated by Standard & Poor's, Moody's, and Fitch between 1985 and 2012 (154'600 tranches), our results provide empirical evidence that rating agencies put more effort in rating and outlook revisions when tranches have assigned multiple ratings. Furthermore, we demonstrate that in the case of multiple ratings, agencies do a better job in discriminating tranches with respect to default risk. On the downside, we observe a shift in collateral towards senior tranches and incentives for issuers to engage in rating shopping activities, but find no evidence that rating agencies exploit such behavior to attract more rating business. Our results contribute to the literature on information production of credit ratings and extend the perspective to the monitoring period after issuance.

Suggested Citation

  • Morkoetter, Stefan & Stebler, Roman & Westerfeld, Simone, 2015. "Competition in the Credit Rating Industry: Benefits for Investors and Issuers," Working Papers on Finance 1505, University of St. Gallen, School of Finance, revised Feb 2016.
    • Handle: RePEc:usg:sfwpfi:2015:05
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Wei Tian & Xiangyun Zhou & Yixiang Tian & Wei Meng, 2020. "Short-term competition and long-term convergence between domestic and global rating agencies: Evidence from China," PLOS ONE, Public Library of Science, vol. 15(5), pages 1-15, May.
    2. Kladakis, George & Chen, Lei & Bellos, Sotirios K., 2020. "Bank asset and informational quality," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 69(C).
    3. Nelson Camanho & Pragyan Deb & Zijun Liu, 2022. "Credit rating and competition," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(3), pages 2873-2897, July.
    4. Victor Olkhov, 2020. "Business Cycles as Collective Risk Fluctuations," Papers 2012.04506, arXiv.org.
    5. Vivian M. van Breemen & Frank J. Fabozzi & Dennis Vink, 2023. "Intensified Competition and The Impact on Credit Ratings in the RMBS market," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 32(2), pages 51-86, May.
    6. Kilian R. Dinkelaker & Andreas-Walter Mattig & Stefan Morkoetter, 2019. "A Closer Look at Credt Rating Processes: Uncovering the Impact of Analyst Rotation," Working Papers on Finance 1911, University of St. Gallen, School of Finance.
    7. Kladakis, George & Chen, Lei & Bellos, Sotirios K., 2022. "Multiple credit ratings and liquidity creation," Finance Research Letters, Elsevier, vol. 46(PA).
    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. Xiangyun Zhou, 2021. "Can the dual-rating regulation improve the rating quality of Chinese corporate bonds?," PLOS ONE, Public Library of Science, vol. 16(12), pages 1-15, December.
    10. Wenming Xu & Yan Liu, 2021. "Does reputational capital affect credit rating agencies?: empirical evidence from a natural experiment in China," European Journal of Law and Economics, Springer, vol. 51(3), pages 433-468, June.
    11. Deng, Kaihua & Qiao, Guannan, 2022. "Triple A default," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).
    12. Drago, Danilo & Gallo, Raffaele, 2018. "Do multiple credit ratings affect syndicated loan spreads?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 56(C), pages 1-16.
    13. Doumpos, Michalis & Figueira, José Rui, 2019. "A multicriteria outranking approach for modeling corporate credit ratings: An application of the Electre Tri-nC method," Omega, Elsevier, vol. 82(C), pages 166-180.

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    More about this item

    Keywords

    Multiple Ratings; Information Production; Structured Finance; Rating Agencies; Residential Mortgage-backed Securities; Rating Shopping;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • 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

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