The Economics of Solicited and Unsolicited Credit Ratings

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2014-01-06

Summary:

Editor's Note: The following post comes to us from Paolo Fulghieri, Professor of Finance at the University of North Carolina at Chapel Hill; Günter Strobl, Professor of Finance at the Frankfurt School of Finance and Management; and Han Xia of the Jindal School of Management at the University of Texas at Dallas.

In our paper, The Economics of Solicited and Unsolicited Credit Ratings, forthcoming in the Review of Financial Studies, we develop a dynamic rational expectations model to address the question of why rating agencies issue unsolicited credit ratings and why these ratings are, on average, lower than solicited ratings. We analyze the implications of this practice for credit rating standards, rating fees, and social welfare. Our model incorporates three critical elements of the credit rating industry: (i) the rating agencies’ ability to misreport the issuer’s credit quality, (ii) their ability to issue unsolicited ratings, and (iii) their reputational concerns.

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Link:

http://blogs.law.harvard.edu/corpgov/2013/12/29/the-economics-of-solicited-and-unsolicited-credit-ratings-2/

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Tags:

academic research empirical research credit risk gunter strobl han xia information asymmetries paolo fulghieri ratings agencies reputation

Authors:

R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation,

Date tagged:

01/06/2014, 15:58

Date published:

12/29/2013, 09:00