49 Pages Posted: 6 Oct 2008 Last revised: 25 Sep 2010
Date Written: September 21, 2010
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: 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