Reputation and competition
Subtitle: evidence from the credit rating industry
By: Bo Becker and Todd Milbourn
Contributors: Milbourn, Todd; Harvard Business School
Series: Working paper / Harvard Business School -- 09-051; Working paper (Harvard Business School) -- 09-051
Publisher: Harvard Business School
Published: 2008
Place of publication: Boston
Language: eng
Number of pages: 35
Description: Fair and accurate credit ratings arguably play an important role in the financial system. In an environment absent free entry of rating agencies, the provision of quality ratings is at least partially sustained by the reputational concerns of the rating agencies. The economically significant entry of a third agency into a market that was previously best described as a duopoly provides a unique experiment to examine the effect of increased competition on the disciplining effects of reputation. Using a variety of data sources, we find that competition leads to more issuer-friendly and less informative ratings. First, the credit ratings issues by the two incumbent agencies increased toward good ratings. Second, the correlation between bond yields and ratings fell. And lastly, negative stock price responses to announced rating downgrades are larger in absolute value (a downgrade in this weaker ratings environment is even worse news). Ultimately, our findings are consistent with models that suggest competition can impede the reputational mechanism.
Notes: "October 2008"--Publisher's web site.

Includes bibliographical references.