(Corporate Governance Series 003) The Ownership of Ratings

Eloïc Peyrache and Lucía Quesada ()

FMG Discussion Papers from Financial Markets Group

Abstract: A prevalent feature in rating markets is the possibility for the client to hide the outcome of the rating process, after learning that outcome. This paper identities the optimal contracting arrangement and the circumstances under which simple ownership contracts over ratings implement this optimal solution. We place ourselves in a setting where the decision to obtain a rating is endogenous and where the cost of such a piece of information is a strategic variable (a price) chosen by a rating agency. We then show that clients hiding their ratings can only be an equilibrium outcome if they are sufficiently uncertain of their quality at the time of hiring a certification intermediary and if the decision to get a rating is not observable. For somedistribution functions of clients' qualities, a competitiverating market is a necessary condition for this result toobtain. Competition between rating intermediaries willunambiguously lead to less information being revealed inequilibrium.Key Words: Certification, Corporate Governance.Jel Classification: D23, D82, G34, L15

New Economics Papers: this item is included in nep-mic
Date: 2007-07

Downloads: (external link)
http://fmg.lse.ac.uk/pdfs/dp590CorporateGovernanceatLSE003.pdf (application/pdf)
Financial Markets Group Working Papers are free to download for academics and students, and for our subscribers and sponsors. If you fall into one of these categories but have trouble downloading our papers, or if you do not fall into one of these categories but would like to pay for a copy, please contact us at fmg@lse.ac.uk

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:fmg:fmgdps:dp590

Access Statistics for this paper

More papers in FMG Discussion Papers from Financial Markets Group
Series data maintained by The FMG Administration ().