Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/210022
Authors: 
Holden, Steinar
Natvik, Gisle James
Vigier, Adrien
Year of Publication: 
2012
Series/Report no.: 
Working Paper No. 2012/23
Abstract: 
We develop a model of credit rating agencies (CRAs) based on reputation concerns. Ratings affect investors' choice and, thereby, also issuers' access to funding and default risk. We show that - in equilibrium - the informational content of credit ratings is inferior to that of CRAs' private information. We find that CRAs have a pro-cyclical impact on default risk: in a liquidity boom CRAs help resolve investors' coordination problem, and lower the probability of default; in a liquidity crunch CRAs raise the probability of default. Furthermore, rating standards tend to be pro-cyclical, while biased CRA-incentives will ultimately be self-defeating.
Subjects: 
CRA
credit rating agencies
global games
coordination failure
JEL: 
G24
G33
D82
C72
Persistent Identifier of the first edition: 
ISBN: 
978-82-7553-711-7
Creative Commons License: 
https://creativecommons.org/licenses/by-nc-nd/4.0/deed.no
Document Type: 
Working Paper
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