Credit Ratings: Strategic Issuer Disclosure and Optimal Screening

46 Pages Posted: 27 Nov 2013 Last revised: 13 Mar 2024

See all articles by Jonathan B. Cohn

Jonathan B. Cohn

University of Texas at Austin

Uday Rajan

Stephen M. Ross School of Business, University of Michigan

Günter Strobl

University of Vienna - Department of Finance

Date Written: March 8, 2024

Abstract

We consider a model in which a security issuer can manipulate information observed by a credit rating agency (CRA). We show that stricter screening by the CRA can sometimes lead to increased manipulation by the issuer. Accounting for the issuer's behavior pulls optimal CRA screening towards the extremes of laxness or stringency. Surprisingly, an improvement in prior asset quality can result in more rating errors. In a two-period version of the model, stricter screening can result in more short-run rating errors. Our results suggest complex interplay between issuer and CRA behavior, complicating the evaluation of CRA policy effectiveness.

Keywords: credit rating, screening, strategic disclosure, certification

JEL Classification: D82, L15, G24

Suggested Citation

Cohn, Jonathan B. and Rajan, Uday and Strobl, Günter, Credit Ratings: Strategic Issuer Disclosure and Optimal Screening (March 8, 2024). Ross School of Business Paper No. 1214, Available at SSRN: https://ssrn.com/abstract=2360334 or http://dx.doi.org/10.2139/ssrn.2360334

Jonathan B. Cohn

University of Texas at Austin ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-6827 (Phone)

Uday Rajan (Contact Author)

Stephen M. Ross School of Business, University of Michigan ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
734-764-2310 (Phone)

HOME PAGE: http://webuser.bus.umich.edu/urajan

Günter Strobl

University of Vienna - Department of Finance ( email )

Oskar-Morgenstern-Platz 1
Vienna, 1090
Austria

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