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Does competition affect ratings quality? Evidence from Canadian corporate bonds

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  • Bae, Kee-Hong
  • Driss, Hamdi
  • Roberts, Gordon S.

Abstract

This paper investigates the effect of competition among credit rating agencies on ratings quality. Specifically, we study how the ratings quality of a small local rating agency (DBRS) responds to competition from a large global rating agency (S&P) in rating Canadian corporate bonds. We find that DBRS's ratings become more favorable and less informative about the credit quality of Canadian bonds in response to increased competition from S&P. Our evidence supports the view that reputation concerns are not an effective disciplinary mechanism for small rating agencies facing competitive pressure from their larger peers.

Suggested Citation

  • Bae, Kee-Hong & Driss, Hamdi & Roberts, Gordon S., 2019. "Does competition affect ratings quality? Evidence from Canadian corporate bonds," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 605-623.
  • Handle: RePEc:eee:corfin:v:58:y:2019:i:c:p:605-623
    DOI: 10.1016/j.jcorpfin.2019.07.009
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    1. Attig, Najah & Driss, Hamdi & El Ghoul, Sadok, 2020. "Rating standards around the world: A puzzle?," Emerging Markets Review, Elsevier, vol. 45(C).

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    More about this item

    Keywords

    Credit rating; Competition; Ratings inflation; Canadian rating agency;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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