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How did increased competition affect credit ratings?

  • Bo Becker
  • Todd Milbourn

The credit rating industry has historically been dominated by just two agencies, Moody's and S&P, leading to longstanding legislative and regulatory calls for increased competition. The material entry of a third rating agency (Fitch) to the competitive landscape offers a unique experiment to empirically examine how in fact increased competition affects the credit ratings market. Increased competition from Fitch coincides with lower quality ratings from the incumbents: rating levels went up, the correlation between ratings and market-implied yields fell, and the ability of ratings to predict default deteriorated. We offer several possible explanations for these findings that are linked to existing theories.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16404.

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Date of creation: Sep 2010
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Publication status: published as Becker, Bo & Milbourn, Todd, 2011. "How did increased competition affect credit ratings?," Journal of Financial Economics, Elsevier, vol. 101(3), pages 493-514, September.
Handle: RePEc:nbr:nberwo:16404
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