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Models of Credit Ratings Failures

Author

Listed:
  • Francesco Sangiorgi

    (Stockholm School of Economics-Department of Finance)

Abstract

Drawing on the recent theoretical literature on credit rating agencies (CRAs), we provide a simple model that nests the following frictions: conflicts of interest between CRAs and in¬vestors, regulatory reliance on ratings, investor naiveté and opacity in the rating process. These frictions cause ratings in¬flation and selective disclosure that distort the transmission of information from CRAs to investors, resulting in inefficient financing decisions. Rating-contingent regulation and in¬vestor naiveté exacerbate the conflicts of interest, but are nei¬ther necessary nor sufficient for the occurrence of inefficiencies. The model is used to discuss some of the regulatory response to the 2007-2009 financial crisis.

Suggested Citation

  • Francesco Sangiorgi, 2014. "Models of Credit Ratings Failures," Rivista di Politica Economica, SIPI Spa, issue 1, pages 7-29, January-M.
    • Handle: RePEc:rpo:ripoec:y:2014:i:1:p:7-29
    as

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    More about this item

    Keywords

    credit rating agencies; conflicts of interests; selec¬tive disclosure; information production and selling.;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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