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Can investor-paid credit rating agencies improve the information quality of issuer-paid rating agencies?

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  • Xia, Han
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    Abstract

    This paper examines how the information quality of ratings from an issuer-paid rating agency (Standard and Poor's) responds to the entry of an investor-paid rating agency, the Egan-Jones Rating Company (EJR). By comparing S&P's ratings quality before and after EJR initiates coverage of each firm, I find a significant improvement in S&P's ratings quality following EJR's coverage initiation. S&P's ratings become more responsive to credit risk and its rating changes incorporate higher information content. These results differ from the existing literature documenting a deterioration in the incumbents' ratings quality following the entry of a third issuer-paid agency. I further show that the issuer-paid agency seems to improve the ratings quality because EJR's coverage has elevated its reputational concerns.

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    Bibliographic Info

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

    Volume (Year): 111 (2014)
    Issue (Month): 2 ()
    Pages: 450-468

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    Handle: RePEc:eee:jfinec:v:111:y:2014:i:2:p:450-468

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

    Related research

    Keywords: Credit ratings; Information quality; Investor-paid rating agencies;

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