Does Competition Affect Ratings Quality? Evidence from Canadian Corporate Bonds

Abstract

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