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American Economic Review Vol. 101 No. 3 2011

Did Credit Rating Agencies Make Unbiased Assumptions on CDOs?

John M. Griffin1; Dragon Yongjun Tang2

1 McCombs School of Business, University of Texas at Austin, 1 University Station, Austin, TX 78712. · 2 School of Economics and Finance, University of Hong Kong, K. K. Leung 1005, Pokfulam Road, Hong Kong.

Abstract

We compare key CDO assumptions from two departments within the same rating agency but with different financial incentives. Assumptions made by the ratings division are more favorable than those by the surveillance department. The differences are not explained by collateral switching during the ramp-up period, a long time gap between reports, nor the collapse of the CDO market in 2007 Additionally, CDOs rated with more favorable assumptions by the ratings group were more likely to be subsequently downgraded. As the useful signals from the surveillance group were seemingly ignored, these findings suggest rating agencies bias towards high ratings.

DOI
10.1257/aer.101.3.125
Volume
101
Issue
3
Pages
125-130
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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