Credit rating and competition

Nelson Camanho*, Pragyan Deb, Zijun Liu

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

4 Citations (Scopus)

Abstract

We analyze the effect of competition between credit rating agencies (RA) which trade-off reputation (future income) and rating inflation (current income). We find that relative to monopoly, RA are more likely to inflate ratings under duopoly. Moreover, competition reduces welfare (the net income of the projects that are rated good) if the new entrant has low reputation and increases it if the new entrant has high reputation. Therefore, our results suggest that lowering barriers to entry (thus, allowing low-reputation credit RA to enter the market) might increase the level of rating inflation and reduce welfare.

Original languageEnglish
JournalInternational Journal of Finance and Economics
DOIs
Publication statusAccepted/In press - 2020
Externally publishedYes

Keywords

  • Competition
  • Financial regulation
  • Rating agencies
  • Reputation

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