 Information content of unsolicited credit ratings and incentives of rating agencies: A theorySoku Byoun International Review of Economics & Finance, 2014, vol. 33, issue C, 338-349 Abstract: Unsolicited credit ratings are issued solely at the discretion of rating agencies based on public information. This paper analyzes firms' incentives to solicit credit ratings to signal their quality and rating agencies' incentives to issue unsolicited ratings. Conditions for two types of equilibria are derived. When rating agencies are compensated for the accuracy of ratings under the subscriber-fee scheme, a quasi-separating equilibrium is likely to occur, in which firm quality is revealed through unsolicited ratings. When rating agencies are compensated only for solicited ratings under the issuer-fee scheme, a separating equilibrium results, in which high-quality firms signal through solicited ratings while low-quality firms are revealed through unsolicited ratings. We show that rating agencies have strong incentives to selectively issue unsolicited ratings in order to induce more fee-based solicited ratings under the issuer-fee scheme. Keywords: Unsolicited rating; Asymmetric information; Signaling; Subscriber-fee scheme; Issuer-fee scheme (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:33:y:2014:i:c:p:338-349 DOI: 10.1016/j.iref.2014.02.011 Access Statistics for this article International Review of Economics & Finance is currently edited by H. Beladi and C. Chen More articles in International Review of Economics & Finance from Elsevier |
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