Do Reputational Concerns Lead to Reliable Ratings?

47 Pages Posted: 17 Mar 2008 Last revised: 4 Mar 2016

See all articles by Beatriz Mariano

Beatriz Mariano

Humboldt University of Berlin - Institute of Finance

Date Written: May 21, 2008

Abstract

This paper examines to what extent reputational concerns give rating agencies incentives to reveal information. It demonstrates that, in a simple model in which a rating agency has public and private information about a project, it may ignore private information and even contradict public information in an attempt to minimize reputational costs. A monopolistic agency can act conservatively by issuing too many bad ratings when a project is expected to be good based on private and public information. In a competitive setting, an agency becomes bolder and can issue too many good ratings when a pro ject is expected to be bad based on private and public information. The paper provides a reason for why competition in the ratings industry might lead to overly optimistic ratings even in the absence of conflicts of interest.

Keywords: Reputation, rating agencies, conformism, conservatism, boldness

JEL Classification: D82, G1, G24

Suggested Citation

Mariano, Beatriz, Do Reputational Concerns Lead to Reliable Ratings? (May 21, 2008). Available at SSRN: https://ssrn.com/abstract=1106653 or http://dx.doi.org/10.2139/ssrn.1106653

Beatriz Mariano (Contact Author)

Humboldt University of Berlin - Institute of Finance ( email )

Spandauer Str. 1
Berlin, 10099
Germany

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