Rating Shopping or Catering? An Examination of the Response to Competitive Pressure for CDO Credit Ratings

75 Pages Posted: 1 Feb 2013 Last revised: 27 Apr 2013

John M. Griffin

University of Texas at Austin - Department of Finance

Jordan Nickerson

Boston College

Dragon Yongjun Tang

The University of Hong Kong - School of Economics and Finance

Date Written: April 25, 2013

Abstract

We examine whether “rating shopping” or “rating catering” is a more accurate characterization of rating agency interactions regarding collateralized debt obligations (CDOs) prior to the credit crisis. Although investors paid a premium for dual-ratings, AAA CDO tranches rated by both Moody’s and S&P defaulted more frequently than tranches rated by only one of them, which is inconsistent with pure rating shopping. Even though AAA-rated tranche sizes were typically identical, there was considerable disagreement between S&P’s and Moody’s assumptions on default correlations and even collateral quality. Rating agencies made upward adjustments beyond their model outputs when their competitor had more lenient assumptions. Finally, although S&P’s and Moody’s adjustments and disagreements were not reflected in yields at issuance, they were reflected in subsequent rating downgrades, suggesting that rating agencies later reverted towards their initial models.

JEL Classification: G01, G28

Suggested Citation

Griffin, John M. and Nickerson, Jordan and Tang, Dragon Yongjun, Rating Shopping or Catering? An Examination of the Response to Competitive Pressure for CDO Credit Ratings (April 25, 2013). Available at SSRN: https://ssrn.com/abstract=2209358 or http://dx.doi.org/10.2139/ssrn.2209358

John M. Griffin

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-6621 (Phone)

HOME PAGE: http://www.jgriffin.info

Jordan Nickerson (Contact Author)

Boston College ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

Dragon Yongjun Tang

The University of Hong Kong - School of Economics and Finance ( email )

KKL 1005
Pokfulam Road
Pokfulam
Hong Kong
(852)22194321 (Phone)

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