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Market Power and Credit Rating Standards: Global Evidence

Author

Listed:
  • Hung, Mingyi

    (Hong Kong University of Science & Technology (HKUST))

  • Kraft, Pepa

    (HEC Paris)

  • Wang, Shiheng

    (Hong Kong University of Science & Technology (HKUST))

  • Yu, Gwen

    (University of Michigan)

Abstract

We examine how the market power of credit rating agencies (CRAs) affects their rating standards. Using a global sample across 26 countries from 1994 to 2019, we find that greater market power of global CRAs, measured by their country-level market shares, is associated with stricter corporate ratings. In addition, the increase in global CRAs’ market shares contributes to the tightening trend in their credit ratings worldwide. Exploiting the NRSRO designation of local CRAs in Japan, we find that global CRAs issue more inflated ratings following a decline in their market power. Further, global CRAs’ greater market power is associated with timelier ratings, fewer missed defaults, but more false warnings. Collectively, our findings suggest that global rating agencies’ market power leads to stricter rating standards and timelier ratings by strengthening the agencies’ reputation concerns, but at the expense of increased false warnings.

Suggested Citation

  • Hung, Mingyi & Kraft, Pepa & Wang, Shiheng & Yu, Gwen, 2021. "Market Power and Credit Rating Standards: Global Evidence," HEC Research Papers Series 1447, HEC Paris.
    • Handle: RePEc:ebg:heccah:1447
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    More about this item

    Keywords

    Market Power; Credit Rating Agency; Rating Standards; Reputation;
    All these keywords.

    JEL classification:

    • 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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