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Reputations and credit ratings: Evidence from commercial mortgage-backed securities

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  • Baghai, Ramin P.
  • Becker, Bo

Abstract

How do changes in a rating agency's reputation affect the ratings market? We study the dynamics of credit ratings after Standard & Poor's (S&P) was shut out of a large segment of the commercial mortgage-backed securities (CMBS) ratings market following a procedural mistake. Exploiting the fact that most CMBS have ratings from multiple agencies, we show that S&P subsequently eased its standards compared to other raters. This coincided with a partial recovery in the number of deals S&P was hired to rate. Our findings suggest that an agency can regain market share after suffering reputational damage by issuing optimistic ratings.

Suggested Citation

  • Baghai, Ramin P. & Becker, Bo, 2020. "Reputations and credit ratings: Evidence from commercial mortgage-backed securities," Journal of Financial Economics, Elsevier, vol. 135(2), pages 425-444.
  • Handle: RePEc:eee:jfinec:v:135:y:2020:i:2:p:425-444
    DOI: 10.1016/j.jfineco.2019.06.001
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    Cited by:

    1. Dennis Vink & Mike Nawas & Vivian van Breemen, 2019. "Security design and credit rating risk in the CLO market," DNB Working Papers 643, Netherlands Central Bank, Research Department.
    2. Baghai, Ramin P. & Becker, Bo & Pitschner, Stefan, 2018. "The Private Use of Credit Ratings: Evidence from Investment Mandates," CEPR Discussion Papers 13418, C.E.P.R. Discussion Papers.
    3. Josephson, Jens & Shapiro, Joel, 2020. "Credit ratings and structured finance," Journal of Financial Intermediation, Elsevier, vol. 41(C).

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    More about this item

    Keywords

    Credit ratings; Reputation; Competition; Information quality; Commercial mortgage-backed securities;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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