Abstract

http://ssrn.com/abstract=1573035
 
 

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Credit Rating and Competition


Nelson Camanho


London School of Economics & Political Science (LSE) - Financial Markets Group

Pragyan Deb


International Monetary Fund (IMF); London School of Economics & Political Science (LSE) - Financial Markets Group

Zijun Liu


London School of Economics & Political Science (LSE) - Financial Markets Group

July 2012

22nd Australasian Finance and Banking Conference 2009
AFA 2011 Denver Meetings Paper

Abstract:     
We develop a theoretical model to analyse the e ect of competition on the conflict of interest arising from the issuer pay compensation model of the credit rating industry. We nd that relative to monopoly, rating agencies are more likely to inflate ratings under competition, resulting in lower expected welfare. These results do not depend on the presence of ratings shopping as in Bolton, Freixas, and Shapiro (2012) and Skreta and Veldkamp (2009), but instead focus on the trade-o ff between maintaining reputation (to increase profi ts in the future) and in ating ratings today (to increase current pro fits). Our results suggest that ongoing regulatory initiatives aimed at increasing competition in the ratings industry may reduce overall welfare, unless new entrants have a higher reputation via-a-vis incumbents.

Number of Pages in PDF File: 44

Keywords: Rating agencies, competition, reputation, repeated games, financial regulation

JEL Classification: C73, D43, D82, D83, G24

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Date posted: March 21, 2010 ; Last revised: August 2, 2012

Suggested Citation

Camanho, Nelson and Deb, Pragyan and Liu, Zijun, Credit Rating and Competition (July 2012). 22nd Australasian Finance and Banking Conference 2009; AFA 2011 Denver Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1573035 or http://dx.doi.org/10.2139/ssrn.1573035

Contact Information

Nelson Camanho da Costa Neto
London School of Economics & Political Science (LSE) - Financial Markets Group ( email )
Houghton Street
London WC2A 2AE
United Kingdom
Pragyan Deb (Contact Author)
International Monetary Fund (IMF) ( email )
700 19th Street, N.W.
Washington, DC 20431
United States
London School of Economics & Political Science (LSE) - Financial Markets Group ( email )
Houghton Street
London WC2A 2AE
United Kingdom
Zijun Liu
London School of Economics & Political Science (LSE) - Financial Markets Group ( email )
Houghton Street
London WC2A 2AE
United Kingdom
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