Competition in the Credit Rating Industry: Benefits for Investors and Issuers

Item Type Journal paper
Abstract

We empirically investigate the benefits of multiple ratings not only at issuance of debt instruments but also during the subsequent monitoring phase. Using a record of monthly credit rating migration data on all U.S. residential mortgage-backed securities rated by Standard & Poor's, Moody's, and Fitch between 1985 and 2012 (154'600 tranches), our results provide em-pirical evidence that rating agencies put more effort in rating and outlook revisions when tranches have assigned multiple ratings. Furthermore, we demonstrate that in the case of mul-tiple ratings, agencies do a better job in discriminating tranches with respect to default risk. On the downside, we observe a shift in collateral towards senior tranches and incentives for issuers to engage in rating shopping activities, but find no evidence that rating agencies exploit such behavior to attract more rating business. Our results contribute to the literature on information production of credit ratings and extend the perspective to the monitoring period after issuance.

Authors Morkötter, Stefan; Stebler, Roman & Westerfeld, Simone
Journal or Publication Title Journal of Banking and Finance
Language English
Keywords Multiple Ratings, Information Production, Structured Finance, Rating Agencies, Residential Mortgage-backed Securities, Rating Shopping
Subjects business studies
finance
HSG Classification contribution to scientific community
Refereed No
Date February 2017
Publisher Elsevier
Place of Publication Amsterdam
Series Name School of Finance Working Paper Series
Volume 75
Page Range 235-257
Number of Pages 23
ISSN 0378-4266
ISSN-Digital 1872-6372
Publisher DOI 10.1016/j.jbankfin.2016.09.001
Depositing User Prof. Dr. Simone Westerfeld
Date Deposited 09 Mar 2015 12:20
Last Modified 22 Mar 2017 15:24
URI: https://www.alexandria.unisg.ch/publications/239753

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Citation

Morkötter, Stefan; Stebler, Roman & Westerfeld, Simone (2017) Competition in the Credit Rating Industry: Benefits for Investors and Issuers. Journal of Banking and Finance, 75 235-257. ISSN 0378-4266

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https://www.alexandria.unisg.ch/id/eprint/239753
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