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How Did Increased Competition Affect Credit Ratings?

49 Pages Posted: 6 Oct 2008 Last revised: 25 Sep 2010

Bo Becker

Stockholm School of Economics; Centre for Economic Policy Research (CEPR)

Todd T. Milbourn

Washington University in Saint Louis - Olin Business School

Multiple version iconThere are 2 versions of this paper

Date Written: September 21, 2010

Abstract

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.

Keywords: Credit ratings, competition and reputation, information quality

JEL Classification: C7, D83, G14

Suggested Citation

Becker, Bo and Milbourn, Todd T., How Did Increased Competition Affect Credit Ratings? (September 21, 2010). Harvard Business School Finance Working Paper No. 09-051. Available at SSRN: https://ssrn.com/abstract=1278150 or http://dx.doi.org/10.2139/ssrn.1278150

Bo Becker (Contact Author)

Stockholm School of Economics ( email )

Drottninggatan 98
Dept. of Finance
111 60 Stockholm, 11160
Sweden

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Todd T. Milbourn

Washington University in Saint Louis - Olin Business School ( email )

1 Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6392 (Phone)
314-935-6359 (Fax)

HOME PAGE: http://www.olin.wustl.edu/faculty/milbourn/

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