Reputations and credit ratingsā€”evidence from commercial mortgage-backed securities

Research Seminars
Academic Areas Finance
Professor Bo Becker, Professor of Financial Economics, Stockholm School of Economics
September 29, 2017 | 3:00 PM - 4:00 PM | Friday
AC2 MLT, Level 2, ISB, Hyderabad, India
Contact: Neha Gupta,
neha_gupta@isb.edu
Open to Public
Abstract: We examine a quasi-experimental setting where a rating agency (S&P) was completely shut out of a large segment of the commercial mortgage-backed securities (CMBS) market for more than one year, following a procedural mistake. Exploiting the fact that most CMBS tranches have ratings from multiple agencies, we show that S&P subsequently eased its standards, in particular for large deals and for deals from important issuers. The results suggest that issuing optimistic ratings is a strategy that a rating agency with a weak reputation can use to gain market share in a market with strong competition.