Competition in the Credit Rating Industry: Benefits for Investors and Issuers

51 Pages Posted: 30 Jan 2015 Last revised: 21 Mar 2016

See all articles by Stefan Morkoetter

Stefan Morkoetter

University of St. Gallen - School of Finance

Roman Stebler

University of St. Gallen

Simone Westerfeld

University of St. Gallen (HSG), School of Finance

Date Written: February 28, 2016

Abstract

We empirically investigate the benefits of multiple ratings not only at issuance of debt instruments but also during the subsequent monitoring phase. Using a record of monthly credit rating migration data on all U.S. residential mortgage-backed securities rated by Standard & Poor's, Moody's, and Fitch between 1985 and 2012 (154'600 tranches), our results provide empirical evidence that rating agencies put more effort in rating and outlook revisions when tranches have assigned multiple ratings. Furthermore, we demonstrate that in the case of multiple ratings, agencies do a better job in discriminating tranches with respect to default risk. On the downside, we observe a shift in collateral towards senior tranches and incentives for issuers to engage in rating shopping activities, but find no evidence that rating agencies exploit such behavior to attract more rating business. Our results contribute to the literature on information production of credit ratings and extend the perspective to the monitoring period after issuance.

Keywords: Multiple Ratings, Information Production, Structured Finance, Rating Agencies, Residential Mortgage-backed Securities, Rating Shopping

JEL Classification: G14, G21, G24

Suggested Citation

Morkoetter, Stefan and Stebler, Roman and Westerfeld, Simone, Competition in the Credit Rating Industry: Benefits for Investors and Issuers (February 28, 2016). University of St.Gallen, School of Finance Research Paper No. 2015/05. Available at SSRN: https://ssrn.com/abstract=2557074 or http://dx.doi.org/10.2139/ssrn.2557074

Stefan Morkoetter (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Roman Stebler

University of St. Gallen ( email )

Dufourstrasse 50
St.Gallen, CH-9000
Switzerland

Simone Westerfeld

University of St. Gallen (HSG), School of Finance ( email )

Dufourstrasse
St. Gallen, 9000
Switzerland

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