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Models of Credit Ratings Failures

Francesco Sangiorgi

Rivista di Politica Economica, 2014, issue 1, 7-29

Abstract: Drawing on the recent theoretical literature on credit rating agencies (CRAs), we provide a simple model that nests the following frictions: conflicts of interest between CRAs and in¬vestors, regulatory reliance on ratings, investor naiveté and opacity in the rating process. These frictions cause ratings in¬flation and selective disclosure that distort the transmission of information from CRAs to investors, resulting in inefficient financing decisions. Rating-contingent regulation and in¬vestor naiveté exacerbate the conflicts of interest, but are nei¬ther necessary nor sufficient for the occurrence of inefficiencies. The model is used to discuss some of the regulatory response to the 2007-2009 financial crisis.

Keywords: credit rating agencies; conflicts of interests; selec¬tive disclosure; information production and selling. (search for similar items in EconPapers)
JEL-codes: D83 G01 G18 G24 G28 (search for similar items in EconPapers)
Date: 2014
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Handle: RePEc:rpo:ripoec:y:2014:i:1:p:7-29