Ratings as regulatory stamps

Saltuk Ozerturk

Journal of Economic Behavior & Organization, 2014, vol. 105, issue C, 17-29

Abstract: This paper analyzes the implications of the regulatory benefits that the investors derive from holding highly rated securities for a credit rating agency's (CRA) rating policy. The CRA's endogenous rating fee is shown to be decreasing in the accuracy of the rating. The CRA provides a rating only when the investors’ regulatory benefit exceeds a minimum threshold. The regulatory reliance on ratings unambiguously reduces rating quality. Strategic rating inflation is more likely for complex financial securities with high fixed evaluation costs, and regulatory reliance on ratings expands the class of assets where rating inflation can occur. The ratings solicited by issuers who are more exposed to negative balance sheet shocks are more likely to be inaccurately optimistic.

Keywords: Credit rating agencies; Rating-contingent regulation; Ratings accuracy; Risk transfer; Strategic rating inflation (search for similar items in EconPapers)
JEL-codes: G24 G28 L14 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0167268114001358
Full text for ScienceDirect subscribers only

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: https://EconPapers.repec.org/RePEc:eee:jeborg:v:105:y:2014:i:c:p:17-29

DOI: 10.1016/j.jebo.2014.04.022

Access Statistics for this article

Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

More articles in Journal of Economic Behavior & Organization from Elsevier
Bibliographic data for series maintained by Catherine Liu ().