Working Paper: NBER ID: w16404
Authors: Bo Becker; Todd Milbourn
Abstract: The credit rating industry has historically been dominated by just two agencies, Moody's and S&P, leading to longstanding legislative and regulatory calls for increased competition. The material entry of a third rating agency (Fitch) to the competitive landscape offers a unique experiment to empirically examine how in fact increased competition affects the credit ratings market. Increased competition from Fitch coincides with lower quality ratings from the incumbents: rating levels went up, the correlation between ratings and market-implied yields fell, and the ability of ratings to predict default deteriorated. We offer several possible explanations for these findings that are linked to existing theories.
Keywords: credit ratings; competition; Fitch; Moody's; Standard & Poor's
JEL Codes: G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased competition from Fitch (G24) | Decreased correlation between ratings and market-implied yields (E43) |
| Increased competition from Fitch (G24) | Lower ability of firm-level ratings to predict default events (G33) |
| Increased competition from Fitch (G24) | Higher ratings issued by S&P and Moody's (G24) |