(Corporate Governance Series 003) The Ownership of Ratings
A prevalent feature in rating markets is the possibility for the client to hide the outcome of the rating process, after learning that outcome. This paper identities the optimal contracting arrangement and the circumstances under which simple ownership contracts over ratings implement this optimal solution. We place ourselves in a setting where the decision to obtain a rating is endogenous and where the cost of such a piece of information is a strategic variable (a price) chosen by a rating agency. We then show that clients hiding their ratings can only be an equilibrium outcome if they are sufficiently uncertain of their quality at the time of hiring a certification intermediary and if the decision to get a rating is not observable. For somedistribution functions of clients' qualities, a competitiverating market is a necessary condition for this result toobtain. Competition between rating intermediaries willunambiguously lead to less information being revealed inequilibrium.Key Words: Certification, Corporate Governance.Jel Classification: D23, D82, G34, L15
When requesting a correction, please mention this item's handle: RePEc:fmg:fmgdps:dp590. 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: (The FMG Administration)
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.