Credit Ratings as Coordination Mechanisms

43 Pages Posted: 3 Aug 2004

See all articles by Arnoud W. A. Boot

Arnoud W. A. Boot

University of Amsterdam - Amsterdam Business School; Centre for Economic Policy Research (CEPR); Tinbergen Institute

Todd T. Milbourn

Washington University in Saint Louis - Olin Business School

Anjolein Schmeits

New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: January 29, 2004

Abstract

In this paper, we provide a novel rationale for credit ratings. The rationale that we propose is that credit ratings can serve as a coordinating mechanism in situations where multiple equilibria can obtain. We show that credit ratings provide a "focal point" for firms and their investors, and explore the vital, but previously overlooked implicit contractual relationship between a credit rating agency and a firm via its credit watch procedures. Credit ratings can help fix the desired equilibrium and as such play an economically meaningful role. Our model provides several empirical predictions and insights regarding the expected price impact of rating changes.

Suggested Citation

Boot, Arnoud W. A. and Milbourn, Todd T. and Schmeits, Anjolein B., Credit Ratings as Coordination Mechanisms (January 29, 2004). EFA 2004 Maastricht Meetings Paper No. 2979. Available at SSRN: https://ssrn.com/abstract=305158 or http://dx.doi.org/10.2139/ssrn.305158

Arnoud W. A. Boot

University of Amsterdam - Amsterdam Business School ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 4162 (Phone)
+31 20 525 5318 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Tinbergen Institute ( email )

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Netherlands

Todd T. Milbourn (Contact Author)

Washington University in Saint Louis - Olin Business School ( email )

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St. Louis, MO 63130-4899
United States
314-935-6392 (Phone)
314-935-6359 (Fax)

HOME PAGE: http://www.olin.wustl.edu/faculty/milbourn/

Anjolein B. Schmeits

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

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