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The Issuer-pays Business Model and Competitive Rating Market: Rating Network Structure

Author

Listed:
  • Xiaoyang Zhuo

    (Nankai University)

  • Guangli Xu

    (Nankai University)

  • Yongjin Wang

    (Nankai University)

Abstract

This paper develops an equilibrium model involving credit rating agencies (CRAs), issuers, regulators and investors. The model is based on two key features of the rating industry: the “issuer-pays” business model and competitive market structure. By incorporating the ratings shopping by issuers, we investigate the equilibrium decisions of CRAs and the impact of government regulation on the rating market. More importantly, an evolutionary reform plan named the Rating Network Structure, which is an alliance or a network of CRAs’ rating approaches, is proposed to improve market efficiency. Simulations demonstrate that this structure plays a significant role in increasing rating accuracy and market profits. Furthermore, this paper reveals the detrimental effect of competition on the credit rating industry.

Suggested Citation

  • Xiaoyang Zhuo & Guangli Xu & Yongjin Wang, 2017. "The Issuer-pays Business Model and Competitive Rating Market: Rating Network Structure," The Journal of Real Estate Finance and Economics, Springer, vol. 55(2), pages 216-241, August.
    • Handle: RePEc:kap:jrefec:v:55:y:2017:i:2:d:10.1007_s11146-016-9563-2
    DOI: 10.1007/s11146-016-9563-2
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    References listed on IDEAS

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    Cited by:

    1. Vink, Dennis & Nawas, Mike & van Breemen, Vivian, 2021. "Security design and credit rating risk in the CLO market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    2. Vink, Dennis & Nawas, Mike & van Breemen, Vivian, 2021. "Security design and credit rating risk in the CLO market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    3. Frank Fabozzi & Vivian M. Breemen & Dennis Vink & Mike Nawas & Austin Gengos, 2023. "How much do Investors Rely on Credit Ratings: Empirical evidence from the U.S. and E.U. CLO primary market," Journal of Financial Services Research, Springer;Western Finance Association, vol. 63(2), pages 221-247, April.
    4. Xiangyun Zhou & Yixiang Tian & Ping Zhang & Xiurong Chen, 2018. "Incentive and constraint regulations of rating inflation in collusion over the separation of economic cycles - Markov rating shopping dual reputation model," PLOS ONE, Public Library of Science, vol. 13(10), pages 1-18, October.
    5. van Breemen, Vivian M. & Fabozzi, Frank J. & Vink, Dennis, 2022. "Intensified competition and the impact on credit ratings in the RMBS market," Working Paper Series 2691, European Central Bank.
    6. Chandan Sharma & Archana Singh & Rajan Yadav, 2023. "Impact of Competition in Credit Rating Industry: Evidence From India," SAGE Open, , vol. 13(1), pages 21582440221, January.
    7. Kittiphod Charoontham & Thunyarat Amornpetchkul, 2023. "Compensation reform analysis on inflated credit rating attenuation," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 50(3), pages 627-645, September.

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