Credit Rating Agencies, Financial Market Stability and Efficiency

22 Pages Posted: 23 Mar 2010 Last revised: 14 Feb 2011

See all articles by Christina E. Bannier

Christina E. Bannier

Justus-Liebig-University Giessen

Marcel Tyrell

Zeppelin University

Date Written: February 11, 2011


Do rating agencies increase or decrease financial market stability? This paper analyzes whether credit rating agencies may help to avoid inefficient self-fulfilling credit defaults. If investors follow risk-dominant strategies, we show that rating announcements and investors' private information are complements as far as highly-rated entities are concerned. This helps to stabilize investment behavior and increase efficiency. Rating agencies may even spark off a virtuous circle that increases aggregate information precision. Lack of private information, however, endangers market stability and may trigger credit crises. For lowly-rated entities the opposite holds as private information turns into a substitute for the agencies' services.

Keywords: Information production, rating agencies, stability, efficiency, coordination problems

JEL Classification: D82, G14, G33

Suggested Citation

Bannier, Christina E. and Tyrell, Marcel, Credit Rating Agencies, Financial Market Stability and Efficiency (February 11, 2011). Available at SSRN: or

Christina E. Bannier (Contact Author)

Justus-Liebig-University Giessen ( email )

Licher Str. 62
Gießen, 35394
+49 641 99 22551 (Phone)

Marcel Tyrell

Zeppelin University ( email )

Am Seemooser Horn 20
Friedrichshafen, Lake Constance 88045

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