Abstract - Rationalizing the policy of credit rating agencies

This paper analyzes the policy of rating agencies and provides two rationales which might account for the empirical observation that rating agencies sometimes do not reveal relevant information through their bond ratings. We find that the stickiness of ratings can be advantageous for investors if mandatory portfolio revisions due to ratingbased investment guidelines are subject to transaction costs, or if some investors are privately informed about default risk. The intuition for the latter is that sticky ratings can balance the conflicting interests of uninformed investors, who benefit from public rating information, and informed investors, whose advantage is diminished by ratings.

Gunter Löffler
Department of Finance, University of Ulm (Germany)
26.Oct 2004

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