Credit Ratings: Strategic Issuer Disclosure and Optimal Screening
45 Pages Posted: 27 Nov 2013 Last revised: 26 Jul 2018
Date Written: July 18, 2018
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: Suggested Citation