Opacity, Credit Rating Shopping and Bias

51 Pages Posted: 14 Mar 2012 Last revised: 26 Jan 2018

See all articles by Francesco Sangiorgi

Francesco Sangiorgi

Frankfurt School of Finance & Management gemeinnützige GmbH

Chester S. Spatt

Carnegie Mellon University - David A. Tepper School of Business

Date Written: December 29, 2015

Abstract

We develop a rational expectations model in which an issuer purchases credit ratings sequentially, deciding which to disclose to investors. Opacity about contacts between the issuer and rating agencies induces potential asymmetric information about which ratings the issuer obtained. While the equilibrium forces disclosure of ratings when the market knows these have been generated, endogenous uncertainty about whether there are undisclosed ratings can arise and lead to selective disclosure and rating bias. Although investors account for this bias in pricing, selective disclosure makes ratings noisier signals of project value, leading to inefficient investment decisions. Our paper suggests that regulatory disclosure requirements are welfare-enhancing.

The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2260045.

Keywords: credit rating agencies; ratings shopping; selective disclosure; rational expectations; opacity; ratings bias

JEL Classification: D61, D82, G14, G24, G28

Suggested Citation

Sangiorgi, Francesco and Spatt, Chester S., Opacity, Credit Rating Shopping and Bias (December 29, 2015). Management Science 63, 4016-4036 (2017).. Available at SSRN: https://ssrn.com/abstract=2021073 or http://dx.doi.org/10.2139/ssrn.2021073

Francesco Sangiorgi (Contact Author)

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Adickesallee 34
Frankfurt am Main, 60322
Germany

Chester S. Spatt

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-8834 (Phone)
412-268-6689 (Fax)

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