Credit Ratings and Market Information
Alessio Piccolo and
No 11961, CEPR Discussion Papers from C.E.P.R. Discussion Papers
How does market information affect credit ratings? How do credit ratings affect market information? We analyze a model in which a credit rating agency's (CRA's) rating is followed by a market for credit risk that provides a public signal - the price. A more accurate rating decreases market informativeness, as it diminishes mispricing and, hence, incentives for investor information acquisition. On the other hand, more-informative trading increases CRA accuracy incentives by making rating inflation more transparent. If the first effect is strong, policies that increase reputational sanctions on CRAs decrease rating inflation, but also decrease the total amount of information.
Keywords: Credit; ratings (search for similar items in EconPapers)
JEL-codes: G24 G28 (search for similar items in EconPapers)
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