An equilibrium model of credit rating agencies
AbstractWe develop a model of credit rating agencies (CRAs) based on reputation concerns. Ratings affect investors' choice and, thereby, also issuers' access to funding and default risk. We show that - in equilibrium - the informational content of credit ratings is inferior to that of CRAs' private information. We find that CRAs have a pro-cyclical impact on default risk: in a liquidity boom CRAs help resolve investors' coordination problem, and lower the probability of default; in a liquidity crunch CRAs raise the probability of default. Furthermore, rating standards tend to be pro-cyclical, while biased CRA-incentives will ultimately be selfdefeating.
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Bibliographic InfoPaper provided by Norges Bank in its series Working Paper with number 2012/23.
Length: 31 pages
Date of creation: 18 Dec 2012
Date of revision:
Credit rating agencies; Global games; Coordination failure;
Other versions of this item:
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
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