Date of this Version
Journal of Financial Economics
The paper analyzes the effect of competition between credit rating agencies (CRAs) on the information content of ratings. We show that a monopolistic CRA pools sellers into multiple rating classes and has partial market coverage. This provides an opportunity for market entry. The entrant designs a rating scale distinct from that of the incumbent. It targets higher-than-average companies in each rating grade of the incumbent's rating scale and employs more stringent rating standards. We use Standard and Poor's (S&P) entry into the market for insurance ratings previously covered by a monopolist, A.M. Best, to empirically test the impact of entry on the information content of ratings. The empirical analysis reveals that S&P required higher standards to assign a rating similar to the one assigned by A.M. Best and that higher-than-average quality insurers in each rating category of A.M. Best chose to receive a second rating from S&P.
© 2012. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
ratings, competition, information disclosure, insurance
Doherty, N. A., Kartasheva, A. V., & Phillips, R. D. (2012). Information Effect of Entry Into Credit Ratings Market: The Case of Insurers' Ratings. Journal of Financial Economics, 106 (2), 308-330. http://dx.doi.org/10.1016/j.jfineco.2012.05.012
Date Posted: 27 November 2017
This document has been peer reviewed.