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Credit Rating Agencies and Moral Hazard

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  • Miloš Božovic

    ()
    (Center for Investments and Finance, Belgrade; Faculty of Sciences, University of Novi Sad, Serbia)

  • Branko Uroševic

    ()
    (Faculty of Economics, University of Belgrade; National Bank of Serbia, Serbia)

  • Boško Živkovic

    ()
    (Faculty of Economics, University of Belgrade, Serbia)

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    Abstract

    The failure of credit rating agencies to properly assess risks of complex financial securities was instrumental in setting off the global financial crisis. This paper studies the incentives of companies and rating agencies and argues that the way the current rating market is organized may provide agencies with intrinsic disincentives to accurately report credit risk of securities they rate. Informational inefficiency is only enhanced when rating agencies function as an oligopoly or when they rate structured products. We discuss possible market and regulatory solutions to these problems.

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    File URL: http://www.panoeconomicus.rs/casopis/2011_2/04%20Milos%20Bozovic.pdf
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    Bibliographic Info

    Article provided by Savez ekonomista Vojvodine, Novi Sad, Serbia in its journal Panoeconomicus.

    Volume (Year): 58 (2011)
    Issue (Month): 2 (June)
    Pages: 219-227

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    Handle: RePEc:voj:journl:v:58:y:2011:i:2:p:219-227

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    Web page: http://www.panoeconomicus.rs/

    Related research

    Keywords: Credit rating agencies; Solicited and unsolicited ratings; Moral hazard;

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    1. Patrick Bolton & Xavier Freixas & Joel Shapiro, 2012. "The Credit Ratings Game," Journal of Finance, American Finance Association, vol. 67(1), pages 85-112, 02.
    2. Leonard I. Nakamura & Kasper Roszbach., 2013. "Credit ratings and bank monitoring ability," Working Papers 13-21, Federal Reserve Bank of Philadelphia.
    3. Bo Becker & Todd Milbourn, 2008. "Reputation and competition: evidence from the credit rating industry," Harvard Business School Working Papers 09-051, Harvard Business School, revised Sep 2010.
    4. Reinhart, Carmen, 2002. "Sovereign Credit Ratings Before and After Financial Crises," MPRA Paper 7410, University Library of Munich, Germany.
    5. Bo Becker & Todd Milbourn, 2010. "How did increased competition affect credit ratings?," NBER Working Papers 16404, National Bureau of Economic Research, Inc.
    6. Adam B. Ashcraft & Til Schuermann, 2008. "Understanding the securitization of subprime mortgage credit," Staff Reports 318, Federal Reserve Bank of New York.
    7. Richard Cantor & Frank Packer, 1995. "Multiple ratings and credit standards: differences of opinion in the credit rating industry," Research Paper 9527, Federal Reserve Bank of New York.
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