Credit Ratings and Market Information

Alessio Piccolo and Joel Shapiro

The Review of Financial Studies, 2022, vol. 35, issue 10, 4425-4473

Abstract: Accurate credit ratings are important for both investors and regulators. We demonstrate that the market for credit risk provides an important source of discipline for credit rating agencies (CRAs). We examine a model in which a CRA’s rating is followed by a market for credit risk that provides a public signal – the price. More informative trading increases the CRA’s incentives to be accurate by making rating errors more transparent. We show that this source of discipline is (a) robust to moral hazard, multiple CRAs, and connected primary and secondary markets and (b) specific to the market for credit risk.

JEL-codes: G24 G28 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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