← Search

Review of Financial Studies Vol. 26 No. 9 2013

Rating Shopping or Catering?An Examination of the Response to Competitive Pressure for CDO Credit Ratings

John M. Griffin1,2,3,4,5; Jordan Nickerson1,2,3,4,5; Dragon Yongjun Tang

1 United States Securities and Exchange Commission · 2 Chinese University of Hong Kong · 3 Hong Kong University of Science and Technology · 4 The University of Texas at Austin · 5 University of Hong Kong

Abstract

We examine whether “rating shopping” or “rating catering” is a more accurate characterization of rating agency interactions regarding collateralized debt obligations (CDOs). Although investors paid a premium for dual ratings, AAA CDO tranches rated by both Moody's and S&P defaulted more frequently than tranches rated by only one of them, which is inconsistent with pure rating shopping. Rating agencies made upward adjustments beyond their model when their competitor had more lenient assumptions. Finally, consistent with rating catering, S&P's and Moody's adjustments and disagreements at security issuance were reflected in subsequent rating downgrades, suggesting that adjustments were harmful.

DOI
10.1093/rfs/hht036
Volume
26
Issue
9
Pages
2270-2310
Language
en
Sources
openalex crossref

Cite