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Reputation and competition: evidence from the credit rating industry

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  • Bo Becker

    ()
    (Harvard Business School, Finance Unit)

  • Todd Milbourn

    ()
    (Washington University, St. Louis.John M. Olin School of Business)

Abstract

The credit rating industry has historically been dominated by just two agencies, Moody’s and S&P, leading to longstanding legislative and regulatory calls for increased competition. The material entry of a third rating agency (Fitch) to the competitive landscape offers a unique experiment to empirically examine how in fact increased competition affects the credit ratings market. Increased competition from Fitch coincides with lower quality ratings from the incumbents: rating levels went up, the correlation between ratings and market-implied yields fell, and the ability of ratings to predict default deteriorated. We offer several possible explanations for these findings that are linked to existing theories.

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Bibliographic Info

Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 09-051.

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Length: 49 pages
Date of creation: Oct 2008
Date of revision: Sep 2010
Handle: RePEc:hbs:wpaper:09-051

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  1. John Y. Campbell & Glen B. Taksler, 2002. "Equity Volatility and Corporate Bond Yields," Harvard Institute of Economic Research Working Papers 1945, Harvard - Institute of Economic Research.
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