Do Reputational Concerns Lead to Reliable Ratings?

Beatriz Mariano

FMG Discussion Papers from Financial Markets Group

Abstract: This paper examines to what extent reputational concerns give rating agencies incentives to reveal information. It demonstrates that, in a simple model in which a rating agency has public and private information about a project, it may ignore private information and even contradict public information in an attempt to minimize reputational costs. A monopolistic agency can act conservatively by issuing too many bad ratings when a project is expected to be good based on private and public information. In a competitive setting, an agency becomes bolder and can issue too many good ratings when a project is expected to be bad based on private and public information. The paper provides a reason for why competition in the ratings industry might lead to overly optimistic ratings even in the absence of conflicts of interest.

Date: 2008-06
New Economics Papers: this item is included in nep-cta and nep-ppm
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Citations: View citations in EconPapers (12)

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Working Paper: Do reputational concerns lead to reliable ratings? (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:fmg:fmgdps:dp613

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