Credit Ratings and Market Information
115 Pages Posted: 11 Apr 2017 Last revised: 13 Dec 2021
There are 2 versions of this paper
Credit Ratings and Market Information
Credit Ratings and Market Information
Date Written: December 10, 2021
Abstract
Accurate credit ratings are important for both investors and regulators. We demonstrate that the market for credit risk provides an important source of discipline for credit rating agencies (CRAs). We examine a model in which a CRA's rating is followed by a market for credit risk that provides a public signal -- the price. More-informative trading increases the CRA's incentives to be accurate by making rating errors more transparent. We show that this source of discipline is (i) robust to moral hazard, multiple CRAs, and connected primary and secondary markets; and (ii) specific to the market for credit risk.
Keywords: Credit Ratings, Information, Reputation
JEL Classification: G24, G28
Suggested Citation: Suggested Citation