Working Paper: CEPR ID: DP12648
Authors: Ramin Baghai; Bo Becker
Abstract: How do changes in a rating agency’s reputation affect the ratings market? We study the dynamics of credit ratings after Standard & Poor’s (S&P) was shut out of a large segment of the commercial mortgage-backed securities (CMBS) ratings market following a procedural mistake. Exploiting the fact that most CMBS securities have ratings from multiple agencies, we show that S&P subsequently eased its standards compared to other raters. This coincided with a partial recovery in the number of deals S&P was hired to rate. Our findings are consistent with the view that an agency can regain market share after suffering reputational damage by issuing more optimistic ratings.
Keywords: credit ratings; reputation; competition; information quality; commercial mortgage backed securities
JEL Codes: G20; G24; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reputational damage (F65) | S&P's credit ratings (G24) |
| S&P's credit ratings (G24) | Market share (D33) |
| Reputational damage (F65) | S&P's rating behavior (G24) |
| S&P's rating behavior (G24) | Quality of ratings (L15) |
| Reputational damage (F65) | Portion of AAA-rated tranches (G12) |