Rating-Induced Default Risk and Downgrade Hesitation

  • Hermann Elendner (Redner*in)

Aktivität: VortragWissenschaftlicher Vortrag (Science-to-Science)


Credit ratings should reflect credit risk. Mounting evidence implies they
also impact credit risk. As strategic agencies will take this into account, I build a model to show how this feedback effect incentivizes raters to postpone or omit downgrades which they know would be warranted. If agencies succumb to the conflict of interest, they restrict self-inflicted fee losses by optimally hesitating to announce a strictly positive fraction of merited
announcements. In equilibrium, ratings are informative, but only partially, because the agency withholds information---irrespective of any level of reputation costs.

The model is rich in empirical predictions: It is shown that the probability of agencies concealing downgrades is increasing with obligors' proximity to default and their reliance on external financing, while decreasing in distance to the default boundary and subsequent to crises due to higher reputation costs. For opaque firms more information is held back. Finally,
I derive an identification strategy for empirical tests of the predictions
based on CDS spreads and market-implied ratings.
Zeitraum6 Juni 20128 Juni 2012
EreignistitelFinancial Management Association European Conference
VeranstaltungstypKeine Angaben