IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Credit Ratings as Coordination Mechanisms

  • Arnoud W. A. Boot
  • Todd T. Milbourn
  • Anjolein Schmeits

In this article, we provide a novel rationale for credit ratings. The rationale that we propose is that credit ratings serve as a coordinating mechanism in situations where multiple equilibria can obtain. We show that credit ratings provide a "focal point" for firms and their investors, and explore the vital, but previously overlooked implicit contractual relationship between a credit rating agency (CRA) and a firm through its credit watch procedures. Credit ratings can help fix the desired equilibrium and as such play an economically meaningful role. Our model provides several empirical predictions and insights regarding the expected price impact of rating changes. Copyright 2006, Oxford University Press.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://hdl.handle.net/10.1093/rfs/hhj009
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 19 (2006)
Issue (Month): 1 ()
Pages: 81-118

as
in new window

Handle: RePEc:oup:rfinst:v:19:y:2006:i:1:p:81-118
Contact details of provider: Postal: Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.
Fax: 919-677-1714
Web page: http://www.rfs.oupjournals.org/
Email:


More information through EDIRC

Order Information: Web: http://www4.oup.co.uk/revfin/subinfo/

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Spatt, Chester & Srivastava, Sanjay, 1991. "Preplay Communication, Participation Restrictions, and Efficiency in Initial Public Offerings," Review of Financial Studies, Society for Financial Studies, vol. 4(4), pages 709-26.
  2. Harris, Milton & Raviv, Artur, 1998. "Capital budgeting and delegation," Journal of Financial Economics, Elsevier, vol. 50(3), pages 259-289, December.
  3. Doron Kliger & Oded Sarig, . "The Information Value of Bond Ratings," Rodney L. White Center for Financial Research Working Papers 13-97, Wharton School Rodney L. White Center for Financial Research.
  4. Cantor, Richard & Packer, Frank, 1997. "Differences of opinion and selection bias in the credit rating industry," Journal of Banking & Finance, Elsevier, vol. 21(10), pages 1395-1417, October.
  5. Ederington, Louis H. & Goh, Jeremy C., 1998. "Bond Rating Agencies and Stock Analysts: Who Knows What When?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(04), pages 569-585, December.
  6. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
  7. Da Rin, Marco & Hellmann, Thomas, 2002. "Banks as Catalysts for Industrialization," Journal of Financial Intermediation, Elsevier, vol. 11(4), pages 366-397, October.
  8. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 647-63, October.
  9. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 689-721, August.
  10. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  11. Pamela Nickell & William Perraudin & Simone Varotto, 2001. "Ratings versus equity-based credit risk modelling: an empirical analysis," Bank of England working papers 132, Bank of England.
  12. Hand, John R M & Holthausen, Robert W & Leftwich, Richard W, 1992. " The Effect of Bond Rating Agency Announcements on Bond and Stock Prices," Journal of Finance, American Finance Association, vol. 47(2), pages 733-52, June.
  13. Allen, Franklin, 1990. "The market for information and the origin of financial intermediation," Journal of Financial Intermediation, Elsevier, vol. 1(1), pages 3-30, March.
  14. Stephen Morris, 2001. "Political Correctness," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 231-265, April.
  15. Mark Carey & Mark Hrycay, 2000. "Parameterizing credit risk models with rating data," Finance and Economics Discussion Series 2000-47, Board of Governors of the Federal Reserve System (U.S.).
  16. Louis H. Ederington & Jess B. Yawitz & Brian E. Roberts, 1984. "The Informational Content of Bond Ratings," NBER Working Papers 1323, National Bureau of Economic Research, Inc.
  17. Gale, D., 1992. "Informational Capacity and Financal Collapse," Papers 38, Boston University - Industry Studies Programme.
  18. Alessandro Lizzeri, 1999. "Information Revelation and Certification Intermediaries," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 214-231, Summer.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:oup:rfinst:v:19:y:2006:i:1:p:81-118. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press)

or (Christopher F. Baum)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.