Reputations and Credit Ratings: Evidence from Commercial Mortgage-Backed Securities
56 Pages Posted: 29 Jan 2018 Last revised: 24 Sep 2018
Date Written: January 2018
How do changes in a rating agency's reputation affect the ratings market? We study the dynamics of credit ratings after Standard & Poor's (S&P) was shut out of a large segment of the commercial mortgage-backed securities (CMBS) ratings market following a procedural mistake. Exploiting the fact that most CMBS securities have ratings from multiple agencies, we show that S&P subsequently eased its standards compared to other raters. This coincided with a partial recovery in the number of deals S&P was hired to rate. Our findings are consistent with the view that an agency can regain market share after suffering reputational damage by issuing more optimistic ratings.
Keywords: commercial mortgage-backed securities, Competition, Credit ratings, information quality, reputation
JEL Classification: G20, G24, G28
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