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Rating agencies and the role of rating publication rights

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  • Mählmann, Thomas
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    Abstract

    While credit rating agencies disclose all public ratings as a matter of policy, a firm can choose whether to make a so called private rating public or to keep it confidential. This paper analyzes the economic role of such rating publication rights. In particular, the paper tries to answer the following two questions: (1) If firms have scope to disclose agency ratings at their own discretion, can they use this discretion strategically and conceal low-quality ratings?, and (2), if this is the case, what are the economic implications for rated firms, unrated firms and the rating agency, resulting from strategically motivated selective rating disclosures? Using a theoretical model, it is shown that an equilibrium with partial nondisclosure of low-quality ratings can emerge whenever investors cannot be sure whether rating nondisclosure is due to the firm being not rated, or due to the rating's adverse content. Moreover, since from an investors' perspective, strategically acting rated firms and unrated firms are pooled, unrated firms' debt is always under-valued (compared to a situation in which investors know that the firm is not rated), and the debt of firms concealing their rating is always over-valued.

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    File URL: http://www.sciencedirect.com/science/article/B6VCY-4S19RH5-1/2/819e9676517676645105d2c85d98f0c4
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 32 (2008)
    Issue (Month): 11 (November)
    Pages: 2412-2422

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    Handle: RePEc:eee:jbfina:v:32:y:2008:i:11:p:2412-2422

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Rating agencies Information disclosure Private ratings;

    References

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    1. Krahnen, Jan Pieter & Weber, Martin, 2001. "Generally accepted rating principles: A primer," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 3-23, January.
    2. Daniel M. Covitz & Paul Harrison, 2003. "Testing conflicts of interest at bond rating agencies with market anticipation: evidence that reputation incentives dominate," Finance and Economics Discussion Series 2003-68, Board of Governors of the Federal Reserve System (U.S.).
    3. Cantor, Richard & Packer, Frank, 1997. "Differences of opinion and selection bias in the credit rating industry," Journal of Banking & Finance, Elsevier, vol. 21(10), pages 1395-1417, October.
    4. Ramakrishnan, Ram T S & Thakor, Anjan V, 1984. "Information Reliability and a Theory of Financial Intermediation," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 415-32, July.
    5. Bhattacharya Sudipto & Chiesa Gabriella, 1995. "Proprietary Information, Financial Intermediation, and Research Incentives," Journal of Financial Intermediation, Elsevier, vol. 4(4), pages 328-357, October.
    6. Greg Johnson, 2000. "Yankee Bonds And Cross-Border Private Placements: An Update," Journal of Applied Corporate Finance, Morgan Stanley, vol. 13(3), pages 80-91.
    7. Boot, Arnoud W A & Milbourn, Todd, 2002. "Credit Ratings as Coordination Mechanism," CEPR Discussion Papers 3331, C.E.P.R. Discussion Papers.
    8. Abaffy, J. & Bertocchi, M. & Dupacova, J. & Moriggia, V. & Consigli, G., 2007. "Pricing nondiversifiable credit risk in the corporate Eurobond market," Journal of Banking & Finance, Elsevier, vol. 31(8), pages 2233-2263, August.
    9. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
    10. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 461-83, December.
    11. repec:fip:fedfap:2004-20 is not listed on IDEAS
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    Cited by:
    1. Matthias Efing, 2013. "Bank Capital Regulation with an Opportunistic Rating Agency," CESifo Working Paper Series 4267, CESifo Group Munich.

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