Can investor-paid credit rating agencies improve the information quality of issuer-paid rating agencies?

Han Xia

Journal of Financial Economics, 2014, vol. 111, issue 2, 450-468

Abstract: This paper examines how the information quality of ratings from an issuer-paid rating agency (Standard and Poor's) responds to the entry of an investor-paid rating agency, the Egan-Jones Rating Company (EJR). By comparing S&P's ratings quality before and after EJR initiates coverage of each firm, I find a significant improvement in S&P's ratings quality following EJR's coverage initiation. S&P's ratings become more responsive to credit risk and its rating changes incorporate higher information content. These results differ from the existing literature documenting a deterioration in the incumbents' ratings quality following the entry of a third issuer-paid agency. I further show that the issuer-paid agency seems to improve the ratings quality because EJR's coverage has elevated its reputational concerns.

Keywords: Credit ratings; Information quality; Investor-paid rating agencies (search for similar items in EconPapers)
JEL-codes: D83 G14 G24 G28 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (80)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:111:y:2014:i:2:p:450-468

DOI: 10.1016/j.jfineco.2013.10.015

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