Unsolicited credit ratings are issued solely at the discretion of rating agencies based on public information. This paper analyzes firms' incentives to solicit credit ratings to signal their quality and rating agencies' incentives to issue unsolicited ratings. Conditions for two types of...

A high-quality and granular probability of default (PD) model is on many practical dimensions far superior to any categorical credit rating system. Business adoption of a PD model, however, needs to factor in the long-established business/regulatory conventions built around letter-based credit...

We examine the relative impact of Moody's and S&P ratings on bond yields and find that at issuance, yields on split rated bonds with superior Moody's ratings are about 8 basis points lower than yields on split rated bonds with superior S&P ratings. This suggests that investors differentiate...

Over the past ten years, credit rating agencies have come under intense criticism from both practitioners and academics, first for their failure to identify problems resulting in bankruptcies at Enron and Worldcom and second for providing overly optimistic ratings for structured finance...

In July 2013, Moody's unexpectedly increased the amount of equity credit that speculative-grade firms receive for preferred stock from 50% to 100%. Firms affected by the rule change were suddenly considered less levered by Moody's even though their balance sheets did not change. These firms...

Building on the idea that precision of credit ratings matters for the efficiency of investors' portfolio decisions, the paper analyzes the equilibrium precision of ratings. Our analysis explains why ratings are noisy, exhibit rating inflation and vary across asset classes and over the economic...

This paper argues that a mitigated strict liability regime can incentivize Credit Rating Agencies (CRAs) to produce ratings as accurate as the available forecasting technology allows. A damage cap based on objective factors is introduced in order to avoid crushing liability. Moreover, CRAs are...

This paper investigates the information in corporate credit ratings. If ratings are to be informative indicators of credit risk they must reflect what a risk-averse investor cares about: both raw default probability and systematic risk. We find that ratings are relatively inaccurate measures of...

This note provides a general concept of how the conflict of interest between credit rating agencies and financial entities that hire them to rate issues can be severed. The concept stresses addressing the conflict with minimal government regulation. Only a skeleton concept is offered -- the goal...

The credit rating agencies in the sphere of international finance and the global economy in general perform an important information function. Nevertheless, their activity has been largely discredited recently due to the big number of internal and external factors. Without claiming to solve all...