Competition and Credit Ratings After the Fall∗

We analyze the entry of new credit rating agencies into structured finance products. Our setting is unique as we study a period in which the incumbents’ reputation was extremely poor and the benefit of more fee income from inflating ratings was low. We find entrants cater to issuers by issuing higher ratings than incumbents, particularly for interest-only (IO) tranches. Ratings by incumbents become more generous as the entrants increase their market share in a product type. We also exploit a feature of structured finance that identifies undisclosed rating shopping and find that incumbent ratings increase in shopping. JEL: G18, G21, G24, G28. ∗We thank Bo Becker, Kim Cornaggia, Ben Munyan, Tim Riddiough, Jacob Sagi, Chester Spatt, Dragon Tang, Nancy Wallace, Wenyu Wang as well as workshop participants at ASU, HULM, NBER Summer Institute, RERI, the SEC, UC Davis, UCLA, UNC Chapel Hill, University of South Carolina / University of North Carolina Charlotte’s Fourth Annual Fixed Income Conference, UNSW, University of Southern California, University of Sydney, UT Austin’s Summer Real Estate Symposium, and WU Vienna for helpful comments on earlier drafts. An earlier version of this paper circulated as “When Low Standards are a Winning Strategy: How Credit Rating Agencies Compete.” We gratefully acknowledge partial funding from the Real Estate Research Institute (RERI) for this project.