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How do self-fulfilling prophecies affect financial ratings? An experimental study

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  • Celjo-Hörhager, Sanela
  • Niessen, Alexandra
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    Abstract

    In this experimental study we examine the impact of self-fulfilling prophecies on financial ratings. According to theoretical models like Kuhner (2001), rating agencies are more likely to reveal their private information if their rating can not become self-fulfilling from an ex-post point of view. In our experiment we use two settings in which ratings differ with respect to the degree of their self-fulfilling impact. In connection with a strong self-fulfilling impact of ratings we indeed observe that agencies are more likely to assign ratings which are not in line with their private information. Our results support theoretical findings of Kuhner (2001). However, the pathological equilibrium predicted by the theoretical model does not emerge in our experiment. --

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    Bibliographic Info

    Paper provided by University of Cologne, Centre for Financial Research (CFR) in its series CFR Working Papers with number 06-13.

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    Date of creation: 2006
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    Handle: RePEc:zbw:cfrwps:0613

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    Related research

    Keywords: Self-fulfilling Prophecies; Financial Ratings; Asymmetric Information;

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    References

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    1. Friedman,Daniel & Sunder,Shyam, 1994. "Experimental Methods," Cambridge Books, Cambridge University Press, number 9780521456821, October.
    2. Christoph Kuhner, 2001. "Financial Rating Agencies: Are They Credible? – Insights Into The Reporting Incentives Of Rating Agencies In Times Of Enhanced Systemic Risk," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 53(1), pages 2-26, January.
    3. Lisa Cameron, 1995. "Raising the Stakes in the Ultimatum Game: Experimental Evidence From Indonesia," Working Papers 724, Princeton University, Department of Economics, Industrial Relations Section..
    4. Robert Slonim & Alvin E. Roth, 1998. "Learning in High Stakes Ultimatum Games: An Experiment in the Slovak Republic," Econometrica, Econometric Society, vol. 66(3), pages 569-596, May.
    5. Ernst Fehr & Joseph Henrich & Robert Boyd, 2003. "In Search of Homo Economicus: Behavioral Experiments in 15 Small- Scale Societies," Microeconomics 0305009, EconWPA.
    6. Carlson Mark & Hale Galina B, 2006. "Rating Agencies and Sovereign Debt Rollover," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(2), pages 1-32, September.
    7. Guth, Werner & Schmittberger, Rolf & Schwarze, Bernd, 1982. "An experimental analysis of ultimatum bargaining," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 367-388, December.
    8. Roth, Alvin E. & Vesna Prasnikar & Masahiro Okuno-Fujiwara & Shmuel Zamir, 1991. "Bargaining and Market Behavior in Jerusalem, Ljubljana, Pittsburgh, and Tokyo: An Experimental Study," American Economic Review, American Economic Association, vol. 81(5), pages 1068-95, December.
    9. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
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