This paper examines to what extent reputational concerns give rating agencies incen- tives to reveal information. It demonstrates that, in a simple model in which a rating agency has public and private information about a project, it may ignore private informa- tion and even contradict public information in an attempt to minimize reputational costs. A monopolistic agency can act conservatively by issuing too many bad ratings when a project is expected to be good based on private and public information. In a competitive setting, an agency becomes bolder and can issue too many good ratings when a project is expected to be bad based on private and public information. The paper provides a reason for why competition in the ratings industry might lead to overly optimistic ratings even in the absence of conflicts of interest.
Publication Date
Financial Markets Group Discussion Papers DP 613
