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How did increased competition affect credit ratings?

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  • Bo Becker
  • Todd Milbourn

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.

Suggested Citation

  • Bo Becker & Todd Milbourn, 2010. "How did increased competition affect credit ratings?," NBER Working Papers 16404, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:16404
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    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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