Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/85830 
Year of Publication: 
2002
Series/Report no.: 
Tinbergen Institute Discussion Paper No. 02-058/2
Publisher: 
Tinbergen Institute, Amsterdam and Rotterdam
Abstract: 
In this article, we provide a novel rationale for credit ratings. The rationale that we propose is that credit ratings serve as a coordinating mechanism in situations where multiple equilibria can obtain. We show that credit ratings provide a focal point for firms and their investors, and explore the vital, but previously overlooked implicit contractual relationship between a credit rating agency (CRA) and a firm through its credit watch procedures. Credit ratings can help fix the desired equilibrium and as such play an economically meaningful role. Our model provides several empirical predictions and insights regarding the expected price impact of rating changes.
Document Type: 
Working Paper

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