Working Paper: NBER ID: w17238
Authors: Jie Jack He; Jun Q.J. Qian; Philip E. Strahan
Abstract: We examine whether rating agencies (Moody's, S&P, and Fitch) reward large issuers of mortgage-backed securities, who bring substantial business, by granting them unduly favorable ratings. The initial yield on both AAA-rated and non-AAA rated tranches sold by large issuers is higher than that on similar tranches sold by small issuers during the market boom years of 2004-2006. Moreover, the prices of MBS sold by large issuers drop more than those sold by small issuers, and the differences are concentrated among tranches issued during 2004-2006. We conclude that large issuers receive more favorable ratings and that the market prices the risk of inflated ratings, especially during booming periods.
Keywords: Mortgage-Backed Securities; Credit Ratings; Issuer Size; Financial Crisis
JEL Codes: G01; G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Issuer Size (G24) | Favorable Ratings (D79) |
| Favorable Ratings (D79) | Fraction of AAA-rated Financing (G32) |
| Issuer Size (G24) | Initial Yields on Tranches (G12) |
| Initial Yields on Tranches (G12) | Yield Spread (E43) |
| Issuer Size (G24) | Performance of MBS (E44) |
| Favorable Ratings (D79) | Performance of MBS (E44) |