Information effect of entry into credit ratings market: The case of insurers' ratings

Neil A. Doherty, Anastasia Kartasheva and Richard D. Phillips

Journal of Financial Economics, 2012, vol. 106, issue 2, 308-330

Abstract: The paper analyzes the effect of competition between credit rating agencies (CRAs) on the information content of ratings. We show that a monopolistic CRA pools sellers into multiple rating classes and has partial market coverage. This provides an opportunity for market entry. The entrant designs a rating scale distinct from that of the incumbent. It targets higher-than-average companies in each rating grade of the incumbent's rating scale and employs more stringent rating standards. We use Standard and Poor's (S&P) entry into the market for insurance ratings previously covered by a monopolist, A.M. Best, to empirically test the impact of entry on the information content of ratings. The empirical analysis reveals that S&P required higher standards to assign a rating similar to the one assigned by A.M. Best and that higher-than-average quality insurers in each rating category of A.M. Best chose to receive a second rating from S&P.

Keywords: Ratings; Competition; Information disclosure; Insurance (search for similar items in EconPapers)
JEL-codes: D8 G22 G28 L1 L43 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (49)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:106:y:2012:i:2:p:308-330

DOI: 10.1016/j.jfineco.2012.05.012

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