RATING AGENCIES Harold Cole
نویسندگان
چکیده
For decades credit rating agencies were viewed as trusted arbiters of creditworthiness and their ratings as important tools for managing risk. The common narrative is that the value of ratings was compromised by the evolution of the industry to a form where issuers pay for ratings. In this paper we show how credit ratings have value in equilibrium and how reputation insures that, in equilibrium, ratings will reflect sound assessments of credit worthiness. There will always be an information distortion because of the fact that purchasers of ratings need not reveal them. We argue that regulatory reliance on ratings and the increasing importance of risk-weighted capital in prudential regulation have more likely contributed to distorted ratings than the matter of who pays for them. In this respect, much of the regulatory obsession with the conflict created by issuers paying for ratings is a distraction. Harold Cole Economics Department University of Pennsylvania 3718 Locust Walk 160 McNeil Building Philadelphia, PA 19104 and NBER [email protected] Thomas F. Cooley Department of Economics Stern School of Business 44 West 4th Street, Room 7-88 New York, NY 10012-1126 and NBER [email protected]
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