Credit Ratings: Strategic Issuer Disclosure and Optimal Screening

45 Pages Posted: 27 Nov 2013 Last revised: 26 Jul 2018

See all articles by Jonathan B. Cohn

Jonathan B. Cohn

University of Texas at Austin

Uday Rajan

Stephen M. Ross School of Business, University of Michigan

Günter Strobl

University of Vienna - Department of Finance

Date Written: July 18, 2018

Abstract

We study a model in which an issuer can manipulate information obtained by a credit rating agency (CRA). Better CRA screening reduces the likelihood of a high rating, but increases the value of a rated security. We find that improving the prior quality of assets can have no effect on the quality of a high-rated security, as low-type issuers manipulate more often in equilibrium. The issuer's response to anticipated CRA screening can either amplify or attenuate the effects on accuracy of increased penalties for ratings errors. Our model highlights the importance of strategic issuer disclosure in recent ratings failures.

Keywords: credit rating, screening, strategic disclosure

JEL Classification: G20, L15, D82

Suggested Citation

Cohn, Jonathan B. and Rajan, Uday and Strobl, Günter, Credit Ratings: Strategic Issuer Disclosure and Optimal Screening (July 18, 2018). Ross School of Business Paper No. 1214. Available at SSRN: https://ssrn.com/abstract=2360334 or http://dx.doi.org/10.2139/ssrn.2360334

Jonathan B. Cohn

University of Texas at Austin ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-6827 (Phone)

Uday Rajan (Contact Author)

Stephen M. Ross School of Business, University of Michigan ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
734-764-2310 (Phone)

HOME PAGE: http://webuser.bus.umich.edu/urajan

Günter Strobl

University of Vienna - Department of Finance ( email )

Oskar-Morgenstern-Platz 1
Vienna, 1090
Austria

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