Credit Ratings as Coordination Mechanisms
- 29 January 2004
- preprint
- Published by Elsevier in SSRN Electronic Journal
Abstract
In this paper, we provide a novel rationale for credit ratings. The rationale that we propose is that credit ratings can 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 and a firm via 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.Keywords
This publication has 22 references indexed in Scilit:
- The market for information and the origin of financial intermediationPublished by Elsevier ,2004
- Banks as Catalysts for IndustrializationJournal of Financial Intermediation, 2002
- Parameterizing credit risk models with rating dataJournal of Banking & Finance, 2000
- Bond Rating Agencies and Stock Analysts: Who Knows What When?Journal of Financial and Quantitative Analysis, 1998
- The Cost of Debt for a Financial FirmSSRN Electronic Journal, 1998
- Differences of opinion and selection bias in the credit rating industryJournal of Banking & Finance, 1997
- Monitoring and Reputation: The Choice between Bank Loans and Directly Placed DebtJournal of Political Economy, 1991
- Cross-Sectional Regularities in the Response of Stock Prices to Bond Rating ChangesJournal of Accounting, Auditing & Finance, 1989
- THE INFORMATIONAL CONTENT OF BOND RATINGSJournal of Financial Research, 1987
- The Informational Content of Bond RatingsPublished by National Bureau of Economic Research ,1984