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Credit Ratings and Market Information

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Listed:
  • Alessio Piccolo
  • Joel Shapiro

Abstract

Accurate credit ratings are important for both investors and regulators. We demonstrate that the market for credit risk provides an important source of discipline for credit rating agencies (CRAs). We examine a model in which a CRA’s rating is followed by a market for credit risk that provides a public signal – the price. More informative trading increases the CRA’s incentives to be accurate by making rating errors more transparent. We show that this source of discipline is (a) robust to moral hazard, multiple CRAs, and connected primary and secondary markets and (b) specific to the market for credit risk.

Suggested Citation

  • Alessio Piccolo & Joel Shapiro, 2022. "Credit Ratings and Market Information," The Review of Financial Studies, Society for Financial Studies, vol. 35(10), pages 4425-4473.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:10:p:4425-4473.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhac005
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    References listed on IDEAS

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    JEL classification:

    • 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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