Credit Ratings and Market Information
Year: 2022
Type: article
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 (a) robust to moral hazard, multiple CRAs, and connected primary and secondary markets and (b) specific to the market for credit risk.
Source: Review of Financial Studies
DOI: 10.1093/rfs/hhac005
Authors: Alessio Piccolo, Joel Shapiro
Institutions: Indiana University, University of Oxford
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $3,724
OpenAlex ID: W3123022706