Credit rating agencies (CRAs) very often have been criticized for announcing inaccurate credit ratings and are suspected of being exposed to con‡icts of interest. Despite these objections CRAs remained largely unregulated. Based on Pagano & Immordino (2007), we study the optimal regulation of CRAs in a model where rating quality is unobservable and enforcing regulation is costly. The model show...

Rating agencies claim to look through the cycle when assigning corporate credit ratings, which entails that they are able to separate trend components of default risk from transitory ones. To test whether agencies possess this competence, I take market-based estimates of one-year default probabilities of corporate bond issuers and estimate their long-run trend using the Hodrick-Prescott filter,...

Rating agencies are often criticized for being biased in favor of borrowers, for being too slow to downgrade following credit quality deterioration, and for being oligopolists. Based on a model that takes into account the feedback effects of credit ratings, I show that: (i) rating agencies should focus not only on the accuracy of their ratings but also on the effects of their ratings on the pro...

Generally, information provision and certification have been identified as the major economic functions of rating agencies. This paper analyzes whether the “watchlist” (rating review) instrument has extended the agencies’ role towards a monitoring position, as proposed by Boot, Milbourn, and Schmeits (2006). Using a data set of Moody’s ratings between 1982 and 2004, we find that the overall inf...

This dissertation studies the issues on information and the bond market. The first essay examines the incentives of certified credit rating agencies to issue credit watches. The second essay studies how quality of private information of investors affects bond yield spreads. The third essay studies whether more accrual-based income smoothing is related with better or worse bond ratings. Essay 1:...