Work

One size does not fit all: The value of information and coexistence of rating agencies

Year: 2024

Type: article

Abstract: This study investigates the production of information by multiple rating agencies and the selection of rating agencies when the value of information to buyers is heterogeneous. We argue that firms strategically choose a rating agency based on the value of information. Not only can a rating agency with a finer rating scheme than a dominant agency offer information to the market, but an agency with a coarser scheme can also provide information by serving low‐information‐value users and sellers who could not obtain a rating otherwise. This does not necessarily result in rating shopping. We tested these hypotheses using the U.S. property‐casualty insurance market, examining insurers' rating agency selections among AM Best, Demotech, and S&P. Our results indicate that the value of information to users influences both the design of rating schemes by rating agencies and the selection of rating agencies by firms. The coexistence of multiple rating agencies with different rating schemes suggests their ability to serve heterogeneous information clienteles.

Source: Risk Management and Insurance Review

DOI: 10.1111/rmir.12290

Authors: Hae Jin Chung, Sojung Carol Park, Xiaoying Xie

Institutions: Sejong University, Seoul National University, California State University, Fullerton

Language: English

Topic: Credit Risk and Financial Regulations

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $3,240

Funders: Institute of Management Research, College of Business Administration Seoul National University, Seoul National University