The Credit Ratings Game

Bolton, Patrick, Freixas, Xavier and Shapiro, Joel (2012) The Credit Ratings Game. The Journal of Finance, 67 (1). pp. 85-112.

Abstract

The collapse of AAA-rated structured finance products in 2007 to 2008 has brought renewed attention to conflicts of interest in credit rating agencies (CRAs). We model competition among CRAs with three sources of conflicts: (1) CRAs conflict of understating risk to attract business, (2) issuers’ ability to purchase only the most favorable ratings, and (3) the trusting nature of some investor clienteles. These conflicts create two distortions. First, competition can reduce efficiency, as it facilitates ratings shopping. Second, ratings are more likely to be inflated during booms and when investors are more trusting. We also discuss efficiency-enhancing regulatory interventions.

Item Type: Article
Keywords: Credit rating agencies; Conflicts of interest; Ratings shopping; finance
Subject(s): Finance
Date Deposited: 26 Apr 2012 08:27
Last Modified: 22 Feb 2017 15:56
Funders: N/A
URI: http://eureka.sbs.ox.ac.uk/id/eprint/3481

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