Why Credit Rating Agencies Exist

Economic Notes, Vol. 44, Issue 2, pp. 161-176, 2015

University of Florida Levin College of Law Research Paper No. 15-28

20 Pages Posted: 17 Sep 2015 Last revised: 10 Nov 2015

See all articles by Robert J. Rhee

Robert J. Rhee

University of Florida - Levin College of Law

Multiple version iconThere are 2 versions of this paper

Date Written: 2015

Abstract

Although credit rating agencies exist and are important to the capital markets, there remains a question of why they should exist. Two standard theories are that rating agencies correct a problem of information asymmetry and that they de facto regulate investments. These theories do not fully answer the question. This paper suggests an alternative explanation. While rating agencies produce little new information, they sort information available in the credit market. This sorting function is needed due to the large volume of information in the credit market. Sorting facilitates better credit analysis and investment selection, but bond investors or a cooperative of them cannot easily replicate this function. Outside of their information intermediary and regulatory roles, rating agencies serve a useful market purpose even if credit ratings inherently provide little new information. This alternative explanation has policy implications for the regulation of the industry.

Keywords: credit rating agencies, capital markets, investment regulation, credit analysis

JEL Classification: G20

Suggested Citation

Rhee, Robert J., Why Credit Rating Agencies Exist (2015). Economic Notes, Vol. 44, Issue 2, pp. 161-176, 2015 ; University of Florida Levin College of Law Research Paper No. 15-28. Available at SSRN: https://ssrn.com/abstract=2661632

Robert J. Rhee (Contact Author)

University of Florida - Levin College of Law ( email )

P.O. Box 117625
Gainesville, FL 32611-7625
United States

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