The role that banks play in screening and monitoring their borrowers is well understood. However, these bank activities are costly and unobservable, thus difficult to contract upon. This introduces the possibility of shirking and leads to the question – who monitors the monitor? Financial...

An enduring puzzle is why credit ratings are coarse indicators of issuer credit quality, with a relatively small number of ratings categories being used to describe credit qualities that lie in a continuum. We develop a theoretical model to explain why ratings are coarse even though coarseness...

We develop a model of a credit rating agency in which the rating agency expends due-diligence effort to learn about the issuer's credit risk, and the precision of its rating is predicated both on this effort and the rating agency's a priori unknown ability. We model the communication of ratings...

We examine the multi-faceted effect of creditor rights on the way banks monitor, operate and finance themselves. We present a simple analytical model that shows that a strengthening of creditor rights reduces the need for banks to monitor their borrowers; and that banks, as a result, tilt their...