Working Paper: CEPR ID: DP5432
Authors: Antoine Faure-Grimaud; Eloc Peyrache; Luca Quesada
Abstract: Standard & Poor's provides corporate governance ratings to firms who can, upon learning those, decide to reveal them or not to the market. This paper identifies the circumstances under which such a simple ownership contract over ratings can emerge as the optimal arrangement. Firms hiding their ratings can only be an equilibrium outcome if they are sufficiently uncertain of their quality at the time of hiring a certification intermediary and if the decision to get a rating is not observable. For some distribution functions of firms' qualities, a competitive market is a necessary condition for this result to obtain. Competition between rating intermediaries will unambiguously lead to less information being revealed in equilibrium.
Keywords: certification; corporate governance
JEL Codes: D23; D82; G34; L15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm quality (G32) | decision to reveal ratings (D79) |
| market structure (D49) | decision to reveal ratings (D79) |
| competition (L13) | less information revealed (D89) |
| decision to reveal ratings (D79) | ownership contracts (L14) |