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Does Increased Competition Affect Credit Ratings? A Reexamination of the Effect of Fitch’s Market Share on Credit Ratings in the Corporate Bond Market

Published online by Cambridge University Press:  23 December 2015

Kee-Hong Bae ,
Jun-Koo Kang  and
Jin Wang
Kee-Hong Bae*
Affiliation:
[email protected], York University, Schulich School of Business, North York, Ontario M3J 1P3, Canada
Jun-Koo Kang
Affiliation:
[email protected], Nanyang Technological University, Nanyang Business School, Singapore 639798, Singapore
Jin Wang
Affiliation:
[email protected], Wilfrid Laurier University, School of Business and Economics, Waterloo, Ontario N2L 3C5, Canada.
*
*Corresponding author: [email protected]
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Abstract

We examine two competing views regarding the impact of competition among credit rating agencies on rating quality: the view that rating agencies do not sacrifice their reputation by inflating firm ratings, and the view that competition among rating agencies arising from the conflict of interest inherent in an “issuer pay” model creates pressure to inflate ratings. Using Fitch’s market share as a measure of competition among rating agencies and controlling for the endogeneity problem caused by unobservable industry effects, we find no relation between Fitch’s market share and ratings, suggesting that competition does not lead to rating inflation.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 5 , October 2015 , pp. 1011 - 1035
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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