Tiebreaker: Certification and Multiple Credit Ratings

TLDR

The study examines the economic role of credit rating agencies in the corporate bond market. The authors evaluate three theories of multiple ratings—information production, rating shopping, and regulatory certification. Evidence indicates that additional credit ratings primarily serve regulatory purposes and offer little extra information on credit quality, supporting the regulatory certification theory.

Abstract

ABSTRACT This paper explores the economic role credit rating agencies play in the corporate bond market. We consider three existing theories about multiple ratings: information production, rating shopping, and regulatory certification. Using differences in rating composition, default prediction, and credit spread changes, our evidence only supports regulatory certification. Marginal, additional credit ratings are more likely to occur because of, and seem to matter primarily for, regulatory purposes. They do not seem to provide significant additional information related to credit quality.