Journal of Financial Economics Vol. 111 No. 2 2014
Can investor-paid credit rating agencies improve the information quality of issuer-paid rating agencies?
Abstract
This paper examines how the information quality of ratings from an issuer-paid rating agency (Standard and Poor's) responds to the entry of an investor-paid rating agency, the Egan-Jones Rating Company (EJR). By comparing S&P's ratings quality before and after EJR initiates coverage of each firm, I find a significant improvement in S&P's ratings quality following EJR's coverage initiation. S&P's ratings become more responsive to credit risk and its rating changes incorporate higher information content. These results differ from the existing literature documenting a deterioration in the incumbents' ratings quality following the entry of a third issuer-paid agency. I further show that the issuer-paid agency seems to improve the ratings quality because EJR's coverage has elevated its reputational concerns.
- DOI
- 10.1016/j.jfineco.2013.10.015
- Volume
- 111
- Issue
- 2
- Pages
- 450-468
- Language
- en
- Sources
- crossref openalex bibtex:phds-export.bib