Do Reputational Concerns Lead to Reliable Ratings?
AbstractThis paper examines to what extent reputational concerns give rating agencies incentives to reveal information. It demonstrates that, in a simple model in which a rating agency has public and private information about a project, it may ignore private information and even contradict public information in an attempt to minimize reputational costs. A monopolistic agency can act conservatively by issuing too many bad ratings when a project is expected to be good based on private and public information. In a competitive setting, an agency becomes bolder and can issue too many good ratings when a project is expected to be bad based on private and public information. The paper provides a reason for why competition in the ratings industry might lead to overly optimistic ratings even in the absence of conflicts of interest.
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Bibliographic InfoPaper provided by Financial Markets Group in its series FMG Discussion Papers with number dp613.
Date of creation: Jun 2008
Date of revision:
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Web page: http://www.lse.ac.uk/fmg/
Other versions of this item:
- Beatriz Mariano, 2008. "Do reputational concerns lead to reliable ratings?," LSE Research Online Documents on Economics 24433, London School of Economics and Political Science, LSE Library.
- G1 - Financial Economics - - General Financial Markets
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-06-27 (All new papers)
- NEP-CTA-2008-06-27 (Contract Theory & Applications)
- NEP-PPM-2008-06-27 (Project, Program & Portfolio Management)
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