Abstract

http://ssrn.com/abstract=1540099
 
 

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Rating Agencies in the Face of Regulation


Christian C. Opp


University of Pennsylvania - The Wharton School

Marcus M. Opp


University of California, Berkeley - Finance Group

Milton Harris


University of Chicago - Finance

September 19, 2012

Journal of Financial Economics (JFE), Vol. 108, pp. 64-81, 2013
Chicago Booth Research Paper No. 13-05
Fama-Miller Working Paper

Abstract:     
This paper develops a theoretical framework to shed light on variation in credit rating standards over time and across asset classes. Ratings issued by credit rating agencies serve a dual role: they provide information to investors and are used to regulate institutional investors. We show that introducing rating-contingent regulation that favors highly rated securities may increase or decrease rating informativeness, but unambiguously increases the volume of highly rated securities. If the regulatory advantage of highly rated securities is sufficiently large, delegated information acquisition is unsustainable, since the rating agency prefers to facilitate regulatory arbitrage by inflating ratings. Our model relates rating informativeness to the quality distribution of issuers, the complexity of assets, and issuers' outside options. We reconcile our results with the existing empirical literature and highlight new, testable implications, such as repercussions of the Dodd-Frank Act.

Number of Pages in PDF File: 33

Keywords: Financial Regulation, Rating Agencies, Certification, Dodd-Frank Act

JEL Classification: G24, G28, G01, D82, D83

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Date posted: January 26, 2010 ; Last revised: April 11, 2013

Suggested Citation

Opp, Christian C. and Opp, Marcus M. and Harris, Milton, Rating Agencies in the Face of Regulation (September 19, 2012). Journal of Financial Economics (JFE), Vol. 108, pp. 64-81, 2013; Chicago Booth Research Paper No. 13-05; Fama-Miller Working Paper. Available at SSRN: http://ssrn.com/abstract=1540099 or http://dx.doi.org/10.2139/ssrn.1540099

Contact Information

Christian C. Opp
University of Pennsylvania - The Wharton School ( email )
3620 Locust Walk
2428 SH-DH
Philadelphia, PA 19104
United States
215-573-3186 (Phone)
Marcus M. Opp (Contact Author)
University of California, Berkeley - Finance Group ( email )
Haas School of Business
545 Student Services Building
Berkeley, CA 94720
United States
Milton Harris
University of Chicago - Finance ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-2549 (Phone)
773-702-3195 (Fax)

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