Does Increased Competition Affect Credit Ratings? A Reexamination of the Effect of Fitch's Market Share on Credit Ratings in the Corporate Bond Market

50 Pages Posted: 5 Sep 2013 Last revised: 14 Oct 2013

See all articles by Kee-Hong Bae

Kee-Hong Bae

York University - Schulich School of Business

Jun-Koo Kang

Nanyang Technological University (NTU) - Nanyang Business School

Jin Wang

Wilfrid Laurier University - Lazaridis School of Business & Economics

Date Written: August 23, 2013

Abstract

We examine two competing views regarding the impact of competition among credit rating agencies on rating quality: the view that rating agencies do not sacrifice their reputation by inflating firm ratings and the view that competition among rating agencies arising from the conflict of interest inherent in an ‘issuer pay’ model creates pressure to inflate ratings. Using Fitch’s market share as a measure of competition among rating agencies and controlling for the endogeneity problem caused by unobservable industry effects, we find no relation between Fitch’s market share and ratings, suggesting that competition does not lead to rating inflation.

Keywords: Credit rating, competition, rating quality

JEL Classification: G29

Suggested Citation

Bae, Kee-Hong and Kang, Jun-Koo and Wang, Jin, Does Increased Competition Affect Credit Ratings? A Reexamination of the Effect of Fitch's Market Share on Credit Ratings in the Corporate Bond Market (August 23, 2013). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2320244

Kee-Hong Bae (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100 ext) 20248 (Phone)
416-736-5687 (Fax)

Jun-Koo Kang

Nanyang Technological University (NTU) - Nanyang Business School ( email )

Nanyang Avenue, Block S3-01b-54
Singapore, 639798
Singapore
(+65) 6790-5662 (Phone)
(+65) 6791-3697 (Fax)

HOME PAGE: http://www.nbs.ntu.edu.sg/nbs_corporate/divisions/bnf/index.asp

Jin Wang

Wilfrid Laurier University - Lazaridis School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada

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