Journal Articles
The Credit Ratings Game
Authors
Bolton P, Freixas X, Shapiro J
UPF authors
Type
Scholarly articles
Journal title
The Journal of Finance
Publication year
2012
Volume
67
Number
1
Pages
85-112
ISSN
0022-1082
Publication State
Published
Abstract
The collapse of AAA-rated structured finance products in 2007 to 2008 has brought renewed attention to conflicts of interest in credit rating agencies (CRAs). We model competition among CRAs with three sources of conflicts: (1) CRAs conflict of understating risk to attract business, (2) issuers' ability to purchase only the most favorable ratings, and (3) the trusting nature of some investor clienteles. These conflicts create two distortions. First, competition can reduce efficiency, as it facilitates ratings shopping. Second, ratings are more likely to be inflated during booms and when investors are more trusting. We also discuss efficiency-enhancing regulatory interventions.
Complete citation
Bolton P, Freixas X, Shapiro J. The Credit Ratings Game. The Journal of Finance 2012; 67(1): 85-112.
