Why Did Anyone Listen to the Rating Agencies After Enron?

Journal of Business and Technology Law, Vol. 4, p. 283, 2009

Minnesota Legal Studies Research Paper No. 09-35

13 Pages Posted: 28 Aug 2009

See all articles by Claire A. Hill

Claire A. Hill

University of Minnesota Law School

Date Written: August 26, 2009

Abstract

Enron was rated investment grade by Moody’s, Standard and Poor’s, and Fitch until four days before it declared bankruptcy - scarcely a ringing endorsement of the agencies’ acumen. Even before Enron, the rating agencies had come in for significant criticism. Yet many investors who lost considerable sums in the financial crisis are saying that they relied on the rating agencies. How can this reliance be reconciled with what preceded it? I argue that an adaptive trait - incorporating new data that potentially conflicts with one’s pre-existing worldview so as to preserve as much of that worldview as possible - proved to be maladaptive in this circumstance. There was a plausible story investors could tell themselves about why the rating agencies could ‘get it right’ about the complex securities at issue while having gotten it spectacularly wrong about Enron. It will be interesting to see how, and how much, the agencies’ recent failures affect investors’ beliefs and practices.

Keywords: rating agencies, belief perseverance

Suggested Citation

Hill, Claire Ariane, Why Did Anyone Listen to the Rating Agencies After Enron? (August 26, 2009). Journal of Business and Technology Law, Vol. 4, p. 283, 2009; Minnesota Legal Studies Research Paper No. 09-35. Available at SSRN: https://ssrn.com/abstract=1462539 or http://dx.doi.org/10.2139/ssrn.1462539

Claire Ariane Hill (Contact Author)

University of Minnesota Law School ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States
612-624-6521 (Phone)

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