The ownership of ratings

Antoine Faure-Grimaud, Eloic Peyrache and Lucía Quesada

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: A prevalent feature in rating markets is the possibility for the client to hide the outcome of the rating process, after learning that outcome. This paper identifies the optimal contracting arrangement and the circumstances under which simple ownership contracts over ratings implement this optimal solution. We place ourselves in a setting where the decision to obtain a rating is endogenous and where the cost of such a piece of information is a strategic variable (a price) chosen by a rating agency. We then show that clients hiding their ratings can only be an equilibrium outcome if they are su±ciently uncertain of their quality at the time of hiring a certification intermediary and if the decision to get a rating is not observable. For some distribution functions of clients' qualities, a competitive rating market is a necessary condition for this result to obtain. Competition between rating intermediaries will unambiguously lead to less information being revealed in equilibrium.

Keywords: certification; corporate governance (search for similar items in EconPapers)
JEL-codes: D23 D82 G34 L15 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2007-04-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://eprints.lse.ac.uk/24485/ Open access version. (application/pdf)

Related works:
Journal Article: The ownership of ratings (2009)
Working Paper: The Ownership of ratings (2009)
Working Paper: The Ownership of Ratings (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:24485

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