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Competition and Credit Ratings After the Fall

Author

Listed:
  • Sean Flynn

    (Arizona State University, Tempe, Arizona 85281)

  • Andra Ghent

    (University of Wisconsin–Madison, Madison, Wisconsin 53706)

Abstract

We analyze the entry of new credit rating agencies into structured finance products. Our setting is unique as we study a period in which the incumbents’ reputation was extremely poor and the benefit of more fee income from inflating ratings was low. We find entrants issue higher ratings than incumbents, particularly for interest-only tranches. Using measures of market share that are exogenous to incumbent ratings, we provide suggestive evidence that incumbent rating levels become more generous as entrant market share in a product type increases. We also exploit a feature of structured finance that identifies rating shopping and find that incumbent ratings increase in shopping.

Suggested Citation

  • Sean Flynn & Andra Ghent, 2018. "Competition and Credit Ratings After the Fall," Management Science, INFORMS, vol. 64(4), pages 1672-1692, April.
    • Handle: RePEc:inm:ormnsc:v:64:y:2018:i:4:p:1672-1692
    DOI: 10.287/mnsc.2016.2604
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    References listed on IDEAS

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