Competition in the credit rating Industry: Benefits for investors and issuers |
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| Institution: | 1. University of St. Gallen, St. Gallen Institute of Management in Asia, 111 Amoy Street, 069931 Singapore, Singapore;2. Basler Kantonalbank, 4002 Basel, Switzerland & University of St. Gallen, Dufourstrasse 50, 9000 St. Gallen, Switzerland;1. School of Business, University of Connecticut, Storrs, CT 06268, USA;2. The W. A. Franke College of Business, Northern Arizona University, Flagstaff, AZ 86011, USA;3. Syracuse University, Martin J. Whitman School of Management, Syracuse, NY 13244, USA;4. Bocconi University, Milan, MI 20136, Italy;5. Finance, Innovation & Entrepreneurship, Department of Industrial Management & Engineering (DIME), Indian Institute of Technology, Kanpur 208016, Uttar Pradesh, India;1. Chilean Superintendency of Banks and Financial Institutions (SBIF), Chile;2. IGIER, Bocconi University, Milan, Italy;3. University of Cyprus, Cyprus |
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| Abstract: | We empirically investigate the benefits of multiple ratings not only at issuance of debt instruments but also during the subsequent monitoring phase. Using a record of monthly credit rating migration data on all U.S. residential mortgage-backed securities rated by Standard & Poor's, Moody's, and Fitch between 1985 and 2012 (154,600 tranches), our results provide empirical evidence that rating agencies put more effort in rating and outlook revisions when tranches have assigned multiple ratings. Furthermore, we see that in the case of multiple ratings, agencies do a better job in discriminating tranches with respect to default risk. On the downside, we observe a shift in collateral towards senior tranches and incentives for issuers to engage in rating shopping activities, but find no evidence that rating agencies exploit such behavior to attract more rating business. Our results contribute to the literature on information production of credit ratings and extend the perspective to the monitoring period after issuance. |
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