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Credit Rating Agencies and Moral Hazard


  • Miloš Božovic

    () (Center for Investments and Finance, Belgrade; Faculty of Sciences, University of Novi Sad, Serbia)

  • Branko Uroševic

    () (Faculty of Economics, University of Belgrade; National Bank of Serbia, Serbia)

  • Boško Živkovic

    () (Faculty of Economics, University of Belgrade, Serbia)


The failure of credit rating agencies to properly assess risks of complex financial securities was instrumental in setting off the global financial crisis. This paper studies the incentives of companies and rating agencies and argues that the way the current rating market is organized may provide agencies with intrinsic disincentives to accurately report credit risk of securities they rate. Informational inefficiency is only enhanced when rating agencies function as an oligopoly or when they rate structured products. We discuss possible market and regulatory solutions to these problems.

Suggested Citation

  • Miloš Božovic & Branko Uroševic & Boško Živkovic, 2011. "Credit Rating Agencies and Moral Hazard," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 58(2), pages 219-227, June.
  • Handle: RePEc:voj:journl:v:58:y:2011:i:2:p:219-227

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    References listed on IDEAS

    1. Richard Cantor & Frank Packer, 1995. "Multiple ratings and credit standards: differences of opinion in the credit rating industry," Research Paper 9527, Federal Reserve Bank of New York.
    2. Bappaditya Mukhopadhyay, 2004. "Moral Hazard with Rating Agency: An Incentive Contracting Approach," Annals of Economics and Finance, Society for AEF, vol. 5(2), pages 313-333, November.
    3. Bo Becker & Todd Milbourn, 2008. "Reputation and competition: evidence from the credit rating industry," Harvard Business School Working Papers 09-051, Harvard Business School, revised Sep 2010.
    4. Patrick Bolton & Xavier Freixas & Joel Shapiro, 2012. "The Credit Ratings Game," Journal of Finance, American Finance Association, vol. 67(1), pages 85-112, February.
    5. Nakamura, L.I. & Roszbach, K., 2010. "Credit Ratings and Bank Monitoring Ability," Discussion Paper 2010-37S, Tilburg University, Center for Economic Research.
    6. Carmen M. Reinhart, 2002. "An Introduction," World Bank Economic Review, World Bank Group, vol. 16(2), pages 149-150, August.
    7. Becker, Bo & Milbourn, Todd, 2011. "How did increased competition affect credit ratings?," Journal of Financial Economics, Elsevier, vol. 101(3), pages 493-514, September.
    8. Ashcraft, Adam B. & Schuermann, Til, 2008. "Understanding the Securitization of Subprime Mortgage Credit," Foundations and Trends(R) in Finance, now publishers, vol. 2(3), pages 191-309, June.
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    More about this item


    Credit rating agencies; Solicited and unsolicited ratings; Moral hazard;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage


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