How Did Increased Competition Affect Credit Ratings?
Stockholm School of Economics
Todd T. Milbourn
Washington University in Saint Louis - Olin Business School
NBER Working Paper No. w16404
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.
Number of Pages in PDF File: 49
Date posted: October 4, 2010
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