Credit Ratings as Coordination Mechanisms

Arnoud Boot and Todd T. Milbourn ()
Additional contact information
Todd T. Milbourn: Washington University in St Louis

No 02-058/2, Tinbergen Institute Discussion Papers from Tinbergen Institute

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.

This discussion paper has resulted in a publication in The Review of Financial Studies , 2006, 19(1), 81-118.

Date: 2002-06-21
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://papers.tinbergen.nl/02058.pdf (application/pdf)

Related works:
Journal Article: Credit Ratings as Coordination Mechanisms (2006)
Working Paper: Credit Ratings as Coordination Mechanism (2002)
Working Paper: Credit Ratings as Coordination Mechanisms (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:tin:wpaper:20020058

Access Statistics for this paper

More papers in Tinbergen Institute Discussion Papers from Tinbergen Institute Contact information at EDIRC.
Bibliographic data for series maintained by Tinbergen Office +31 (0)10-4088900 ().