Market Power and Reputational Concerns in the Ratings Industry

43 Pages Posted: 16 Oct 2010 Last revised: 4 Dec 2015

See all articles by Beatriz Mariano

Beatriz Mariano

Humboldt University of Berlin - Institute of Finance

Date Written: December 31, 2011

Abstract

This paper studies the incentives of rating agencies to reveal the information that they obtain about their client firms. In the model, rating agencies seek to maximize their reputation and protect their market power. They observe public information and obtain either precise or noisy private information about a firm. Reputational concerns dictate that a rating reflects private information when it is precise. However, when private information is noisy, two situations arise. In a monopoly, the rating agency may ignore private information and issue a rating that conforms to public information. Under some conditions, it may even become cautious and issue bad ratings ignoring both types of information. With competition, however, it has incentives to contradict public information as a way to pretend that it holds precise private information. Moreover, it may become more likely to issue good ratings in an attempt to protect market power.

Keywords: Reputation, Rating agencies, Market power, Conformism, Private and public information

JEL Classification: D82, G10, G24

Suggested Citation

Mariano, Beatriz, Market Power and Reputational Concerns in the Ratings Industry (December 31, 2011). Journal of Banking and Finance (2012), 36(6), 1616-1626. Available at SSRN: https://ssrn.com/abstract=1692254 or http://dx.doi.org/10.2139/ssrn.1692254

Beatriz Mariano (Contact Author)

Humboldt University of Berlin - Institute of Finance ( email )

Spandauer Str. 1
Berlin, 10099
Germany

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