Abstract - Competition among Credit Rating Agencies and Ratings Accuracy

Credit rating industry is highly concentrated. According to the SEC NRSRO report 2008 the three major agencies, Moody’s, Standard and Poor’s and Fitch, issued 99% of all outstanding ratings. From June 2007 SEC has adopted rules to implement provisions of the "Credit Rating Agency Reform Act of 2006" that aimed to substantially simplify the process of obtaining a NRSRO status and, ultimately, promote competition. This policy has substantially diminished the regulatory barriers of entry. It has increased the current number of NRSROs to ten. However, till now there is no agreement about the impact of competition on the quality of information provided by credit raters.
In the paper we analyze the interaction between competitive pressures to differentiate in ratings and ratings accuracy. The information content of a rating has two aspects. First, CRAs’ rating methodologies determine the set of characteristics that a company/ security has to meet to be assigned a particular rating. Second, CRAs decide how much effort to invest in precision of information about each characteristic. Both aspects contribute to the precision and reliability of a rating. 
The information quality is the highest when rating agencies invest in high precision and investigate all company’s characteristics. However, we show that this is not an equilibrium. When CRAs compete for clients, they differentiate the information content of their ratings. As a result ratings from different agencies are not perfectly comparable in terms of their information content. This strategy relaxes competition among CRAs and creates demand for multiple ratings.

Anastasia Kartasheva
Room "DZ Bank" (HoF)
Wharton School
23.Jun 2009

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