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How did increased competition affect credit ratings?

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  • Becker, Bo
  • Milbourn, Todd

Abstract

The credit rating industry has historically been dominated by just two agencies, Moody's and Standard & Poor's, leading to long-standing legislative and regulatory calls for increased competition. The material entry of a third rating agency (Fitch) to the competitive landscape offers a unique experiment to empirically examine how increased competition affects the credit ratings market. What we find is relatively troubling. Specifically, we discover that increased competition from Fitch coincides with lower quality ratings from the incumbents: Rating levels went up, the correlation between ratings and market-implied yields fell, and the ability of ratings to predict default deteriorated. We offer several possible explanations for these findings that are linked to existing theories.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 101 (2011)
Issue (Month): 3 (September)
Pages: 493-514

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Handle: RePEc:eee:jfinec:v:101:y:2011:i:3:p:493-514

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Web page: http://www.elsevier.com/locate/inca/505576

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Keywords: Credit ratings Competition and reputation Information quality;

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References

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