The Use of Credit Ratings in the Delegated Management of Fixed Income Assets

Ramin P. Baghai (), Bo Becker and Stefan Pitschner ()
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Ramin P. Baghai: Stockholm School of Economics, SE-113 83 Stockholm, Sweden; European Corporate Governance Institute, 1000 Brussels, Belgium; Centre for Economic Policy Research, London EC1V 0DX, United Kingdom
Stefan Pitschner: CUNY Queens College Business School, Queens, New York 11367

Management Science, 2024, vol. 70, issue 5, 3059-3079

Abstract: Investment mandates of fixed income funds constrain managers’ portfolio decisions, often employing credit ratings to classify asset risk. We categorize U.S. and European fixed income funds’ mandates using textual analysis and measure the use of ratings. Over the past two decades, despite the weaknesses of ratings revealed in the global financial crisis, ratings use has increased significantly. Since 2010, the fraction of funds not using ratings in any way has fallen by almost half in both the United States and Europe. By 2020, 94% of U.S. funds and 65% of European funds used ratings. These patterns fit agency-based models of investment mandates and point to a lack of practically useful alternatives.

Keywords: credit ratings; investment mandates; delegated asset management; financial crisis (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:5:p:3059-3079

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