Competition and Credit Ratings After the Fall

68 Pages Posted: 11 Nov 2014 Last revised: 20 Jul 2016

See all articles by Sean Flynn

Sean Flynn

Tulane University

Andra C. Ghent

University of North Carolina (UNC) at Chapel Hill - Finance Area

Date Written: June 6, 2016

Abstract

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

Flynn, Sean and Ghent, Andra C., Competition and Credit Ratings After the Fall (June 6, 2016). Available at SSRN: https://ssrn.com/abstract=2521216 or http://dx.doi.org/10.2139/ssrn.2521216

Sean Flynn

Tulane University ( email )

6823 St Charles Ave
New Orleans, LA 70118
United States

Andra C. Ghent (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

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