Review of Finance Vol. 29 No. 1 2025

Credit ratings: strategic issuer disclosure and optimal screening

Jonathan B. Cohn¹; Uday Rajan²; Günter Strobl³

¹ McCombs School of Business, University of Texas , Austin, Texas, · ² Stephen M. Ross School of Business, University of Michigan , Ann Arbor, Michigan, · ³ Department of Finance, University of Vienna , Vienna,

Abstract

We consider a model in which a security issuer can manipulate information observed by a credit rating agency (CRA). We show that stricter screening by the CRA can sometimes lead to increased manipulation by the issuer. Accounting for the issuer’s behavior pulls optimal CRA screening toward the extremes of laxness or stringency. Surprisingly, an improvement in prior asset quality can result in more rating errors. In a two-period version of the model, stricter screening can result in more short-run rating errors. Our results suggest complex interplay between issuer and CRA behavior, complicating the evaluation of CRA policy effectiveness.

DOI

10.1093/rof/rfae035

Volume

29

Issue

1

Pages

169-199

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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