How Did Increased Competition Affect Credit Ratings?
Stockholm School of Economics; Centre for Economic Policy Research (CEPR)
Todd T. Milbourn
Washington University in Saint Louis - Olin Business School
September 21, 2010
Harvard Business School Finance Working Paper No. 09-051
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
Keywords: Credit ratings, competition and reputation, information quality
JEL Classification: C7, D83, G14
Date posted: October 6, 2008 ; Last revised: September 25, 2010