Competition and Credit Ratings After the Fall
68 Pages Posted: 11 Nov 2014 Last revised: 20 Jul 2016
Date Written: June 6, 2016
We analyze the entry of new credit rating agencies into structured finance products. Our setting is unique as we study a period in which the incumbents’ reputation was extremely poor and the benefit of more fee income from inflating ratings was low. We find entrants cater to issuers by issuing higher ratings than incumbents, particularly for interest-only (IO) tranches. Using measures of market share that are exogenous to incumbent ratings, we provide suggestive evidence that incumbent rating levels become more generous as entrant market share in a product type increases. We also exploit a feature of structured finance that identifies rating shopping and find that incumbent ratings increase in shopping.
JEL Classification: G18, G21, G24, G28, M21
Suggested Citation: Suggested Citation