How Did Increased Competition Affect Credit Ratings?

49 Pages Posted: 4 Oct 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 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.

Suggested Citation

Becker, Bo and Milbourn, Todd T., How Did Increased Competition Affect Credit Ratings? (September 2010). NBER Working Paper No. w16404. Available at SSRN: https://ssrn.com/abstract=1685691

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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