Credit Ratings as Coordination Mechanisms

Arnoud Boot, Todd T. Milbourn and Anjolein Schmeits

The Review of Financial Studies, 2006, vol. 19, issue 1, 81-118

Abstract: In this article, we provide a novel rationale for credit ratings. The rationale that we propose is that credit ratings serve as a coordinating mechanism in situations where multiple equilibria can obtain. We show that credit ratings provide a "focal point" for firms and their investors, and explore the vital, but previously overlooked implicit contractual relationship between a credit rating agency (CRA) and a firm through its credit watch procedures. Credit ratings can help fix the desired equilibrium and as such play an economically meaningful role. Our model provides several empirical predictions and insights regarding the expected price impact of rating changes. Copyright 2006, Oxford University Press.

Date: 2006
References: Add references at CitEc
Citations: View citations in EconPapers (159)

Downloads: (external link)
http://hdl.handle.net/10.1093/rfs/hhj009 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Credit Ratings as Coordination Mechanism (2002)
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:oup:rfinst:v:19:y:2006:i:1:p:81-118

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

The Review of Financial Studies is currently edited by Itay Goldstein

More articles in The Review of Financial Studies from Society for Financial Studies Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().