Does Competition Affect Ratings Quality? Evidence from Canadian Corporate Bonds
55 Pages Posted: 10 Mar 2018 Last revised: 22 Dec 2019
Date Written: July 24, 2019
This paper investigates the effect of competition among credit rating agencies on ratings quality. Specifically, we study how the ratings quality of a small local rating agency (DBRS) responds to competition from a large global rating agency (S&P) in rating Canadian corporate bonds. We find that DBRS's ratings become more favorable and less informative about the credit quality of Canadian bonds in response to increased competition from S&P. Our evidence supports the view that reputation concerns are not an effective disciplinary mechanism for small rating agencies facing competitive pressure from their larger peers.
Keywords: Credit Rating, Competition, Ratings Inflation, Canadian Rating Agency
JEL Classification: D43, G24, G28, L14, L15
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