AcademicsWorking Papers

Race to the Top: Credit Rating Bias from Competition
Yun Wang, Yilan Xu
#002255 20150324 ()
Empirical studies have found that competition among credit rating agencies (CRAs) deteriorates the quality of ratings. We provide a game theoretical framework to analyze CRA competition in the the context of conflict of interest. We show that competition among CRAs distorts the rating when the rating is paid for by the security issuer. As the degree of competition increases, the rating deviates more and the investors' utility declines. If the CRAs can publish unsolicited ratings, the degree of rating inflation decreases but does not vanish.
Keywords: information bias, competition, credit rating shopping, conflict of interest, solicited rating, unsolicited rating

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