Information Effect of Entry into Credit Ratings Market: The Case of Insurers' Ratings

59 Pages Posted: 7 Mar 2008 Last revised: 22 Sep 2013

See all articles by Neil A. Doherty

Neil A. Doherty

University of Pennsylvania - Insurance & Risk Management Department; University of Pennsylvania - Business & Public Policy Department

Anastasia V. Kartasheva

International Association of Insurance Supervisors, c/o Bank for International Settlements

Richard D. Phillips

Georgia State University - Risk Management & Insurance Department

Date Written: August 21, 2011

Abstract

The paper analyzes the effect of competition between credit rating agencies (CRAs) on the information content of ratings. We show that a monopolistic CRA pools sellers into multiple rating classes and has partial market coverage. This provides an opportunity for market entry. The entrant designs a rating scale distinct from that of the incumbent. It targets higher-than-average companies in each rating grade of the incumbent's rating scale and employs more stringent rating standards. We use Standard and Poor's (S&P) entry into the market for insurance ratings previously covered by a monopolist, A.M. Best, to empirically test the impact of entry on the information content of ratings. The empirical analysis reveals that S&P required higher standards to assign a rating similar to the one assigned by A.M. Best and that higher-than-average quality insurers in each rating category of A.M. Best chose to receive a second rating from S&P.

Keywords: Ratings, competition, information disclosure, insurance

JEL Classification: D8, G22, G28, L1, L43

Suggested Citation

Doherty, Neil A. and Kartasheva, Anastasia V. and Phillips, Richard D., Information Effect of Entry into Credit Ratings Market: The Case of Insurers' Ratings (August 21, 2011). Journal of Financial Economics (JFE), Vol. 106, No. 2, 2012. Available at SSRN: https://ssrn.com/abstract=1101700 or http://dx.doi.org/10.2139/ssrn.1101700

Neil A. Doherty

University of Pennsylvania - Insurance & Risk Management Department ( email )

Philadelphia, PA 19104-6365
United States
215-898-7652 (Phone)
215-898-0310 (Fax)

University of Pennsylvania - Business & Public Policy Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6372
United States

Anastasia V. Kartasheva (Contact Author)

International Association of Insurance Supervisors, c/o Bank for International Settlements ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Richard D. Phillips

Georgia State University - Risk Management & Insurance Department ( email )

P.O. Box 4036
Atlanta, GA 30303
United States
404-413-7009 (Phone)

HOME PAGE: http://robinson.gsu.edu/profile/richard-d-phillips/

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