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Structured debt ratings: Evidence on conflicts of interest

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  • Efing, Matthias
  • Hau, Harald

Abstract

We test if issuers of asset- and mortgage-backed securities receive rating favors from agencies with which they maintain strong business relationships. Controlling for issuer fixed effects and a large set of credit risk determinants, we show that agencies publish better ratings for those issuers that provide them with more bilateral securitization business. Such rating favors are larger for very complex structured debt deals and for deals issued during the credit boom period. Our analysis is based on a new deal-level rating statistic that accounts for the full distribution of tranche ratings below the AAA cut-off point of a structured debt deal.

Suggested Citation

  • Efing, Matthias & Hau, Harald, 2015. "Structured debt ratings: Evidence on conflicts of interest," Journal of Financial Economics, Elsevier, vol. 116(1), pages 46-60.
  • Handle: RePEc:eee:jfinec:v:116:y:2015:i:1:p:46-60
    DOI: 10.1016/j.jfineco.2014.11.009
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    Cited by:

    1. Morkoetter, Stefan & Stebler, Roman & Westerfeld, Simone, 2015. "Competition in the Credit Rating Industry: Benefits for Investors and Issuers," Working Papers on Finance 1505, University of St. Gallen, School of Finance, revised Feb 2016.
    2. Markus K. Brunnermeier & Sam Langfield & Marco Pagano & Ricardo Reis & Stijn Van Nieuwerburgh & Dimitri Vayanos, 2017. "ESBies: safety in the tranches," Economic Policy, CEPR;CES;MSH, vol. 32(90), pages 175-219.
    3. Martin Kuncl, 2016. "Fragility of Resale Markets for Securitized Assets and Policy of Asset Purchases," Staff Working Papers 16-46, Bank of Canada.
    4. repec:oup:rfinst:v:30:y:2017:i:9:p:3269-3304. is not listed on IDEAS
    5. repec:wsi:gcrxxx:v:05:y:2015:i:01:n:s2010493615500087 is not listed on IDEAS
    6. Efing, Matthias, 2015. "Arbitraging the Basel securitization framework: Evidence from German ABS investment," Discussion Papers 40/2015, Deutsche Bundesbank.
    7. Mariassunta Giannetti & José María Liberti & Jason Sturgess, 2017. "Information Sharing and Rating Manipulation," Review of Financial Studies, Society for Financial Studies, vol. 30(9), pages 3269-3304.
    8. repec:eee:jfinec:v:127:y:2018:i:1:p:94-112 is not listed on IDEAS
    9. repec:gam:jjrfmx:v:11:y:2018:i:2:p:24-:d:145854 is not listed on IDEAS
    10. Baghai, Ramin P. & Becker, Bo, 2018. "Reputations and credit ratings: evidence from commercial mortgage-backed securities," CEPR Discussion Papers 12648, C.E.P.R. Discussion Papers.
    11. Morkoetter, Stefan & Stebler, Roman & Westerfeld, Simone, 2017. "Competition in the credit rating Industry: Benefits for investors and issuers," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 235-257.
    12. Michael R King & Steven Ongena & Nikola Tarashev, 2016. "Bank standalone credit ratings," BIS Working Papers 542, Bank for International Settlements.
    13. Baghai, Ramin P. & Becker, Bo, 2018. "Non-rating revenue and conflicts of interest," Journal of Financial Economics, Elsevier, vol. 127(1), pages 94-112.
    14. repec:eee:finana:v:61:y:2019:i:c:p:245-254 is not listed on IDEAS

    More about this item

    Keywords

    Credit ratings; Ratings inflation; Conflict of interest; Structured debt;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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