Market Power and Credit Rating Standards: Global Evidence

Journal of Accounting and Economics, Forthcoming

HEC Paris Research Paper No ACC-2021-1447

68 Pages Posted: 15 Dec 2021 Last revised: 6 Dec 2022

See all articles by Mingyi Hung

Mingyi Hung

Hong Kong University of Science & Technology (HKUST)

Pepa Kraft

HEC Paris

Shiheng Wang

Hong Kong University of Science & Technology (HKUST)

Gwen Yu

University of Michigan

Date Written: December 14, 2021

Abstract

We examine how the market power of credit rating agencies (CRAs) affects their rating standards. Using a global sample across 26 countries from 1994 to 2019, we find that greater market power of global CRAs, measured by their country-level market shares, is associated with stricter corporate ratings. In addition, the increase in global CRAs’ market shares contributes to the tightening trend in their credit ratings worldwide. Exploiting the NRSRO designation of local CRAs in Japan, we find that global CRAs issue more inflated ratings following a decline in their market power. Further, global CRAs’ greater market power is associated with timelier ratings, fewer missed defaults, but more false warnings. Collectively, our findings suggest that global rating agencies’ market power leads to stricter rating standards and timelier ratings by strengthening the agencies’ reputation concerns, but at the expense of increased false warnings.

Keywords: Market Power; Credit Rating Agency; Rating Standards; Reputation

JEL Classification: G15;G24

Suggested Citation

Hung, Mingyi and Kraft, Pepa and Wang, Shiheng and Yu, Gwen, Market Power and Credit Rating Standards: Global Evidence (December 14, 2021). Journal of Accounting and Economics, Forthcoming, HEC Paris Research Paper No ACC-2021-1447 , Available at SSRN: https://ssrn.com/abstract=3985644

Mingyi Hung (Contact Author)

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Pepa Kraft

HEC Paris ( email )

Jouy-en-Josas
France
644161543 (Phone)

HOME PAGE: http://www.hec.edu/Faculty-Research/Faculty-Directory/KRAFT-Pepa2

Shiheng Wang

Hong Kong University of Science & Technology (HKUST) ( email )

Clear Water Bay
Kowloon, 999999
Hong Kong
(852) 2358 7570 (Phone)
(852) 2358 1693 (Fax)

Gwen Yu

University of Michigan ( email )

701 Tappan Street
R3350
Ann Arbor, MI MI 48109
United States
7347635934 (Phone)

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