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). 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 )

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Todd T. Milbourn (Contact Author)

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

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Anjolein B. Schmeits

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

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

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