Credit rating and competition. (26th October 2020)

• Record Type: Journal Article
• Authors: Camanho, Nelson; Deb, Pragyan; Liu, Zijun
• Is Part Of: International journal of finance & economics. Volume 27:Number 3(2022)
• Page Start: 2873
• Page End: 2897
• Publication Date: 2020-10-26
• Subjects: competition -- financial regulation -- rating agencies -- reputation; International finance -- Periodicals; Economics -- Periodicals; 332
• DOI: 10.1002/ijfe.2303
• Languages: English
• ISSNs: 1076-9307

Abstract

Abstract: We analyze the effect of competition between credit rating agencies (RA) which trade‐off reputation (future income) and rating inflation (current income). We find that relative to monopoly, RA are more likely to inflate ratings under duopoly. Moreover, competition reduces welfare (the net income of the projects that are rated good) if the new entrant has low reputation and increases it if the new entrant has high reputation. Therefore, our results suggest that lowering barriers to entry (thus, allowing low‐reputation credit RA to enter the market) might increase the level of rating inflation and reduce welfare.