Credit Rating Inflation: Is It Still Relevant and Who Prices It?

Christoph Herpfer and Gonzalo Maturana

MPRA Paper from University Library of Munich, Germany

Abstract: Credit rating agencies (CRAs) are less likely and slower to downgrade firms with performance sensitive debt (PSD) if these downgrades increase borrowing costs. This effect is not driven by selection into PSD contracts, borrowers hiding information from CRAs, or by firms about to lose their investment grade classification. Moreover, originating banks seem aware of the CRAs' conflicts of interest, and sell loans with more embedded conflicts more frequently. In contrast, secondary market participants do not price conflicts of interest to the same extent. The recent settlements between the major CRAs and the U.S. government do not appear to prevent credit inflation.

Keywords: Credit ratings; performance-sensitive debt; rating catering (search for similar items in EconPapers)
JEL-codes: G0 G01 G1 G10 G18 G20 G21 G24 G28 G3 (search for similar items in EconPapers)
Date: 2020-10-01
New Economics Papers: this item is included in nep-ban, nep-cwa and nep-isf
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:109461

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