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(Corporate Governance Series 003) The Ownership of Ratings

Author

Listed:
  • Eloïc Peyrache
  • Lucia Quesada
Abstract
A prevalent feature in rating markets is the possibility for the client to hide the outcome of the rating process, after learning that outcome. This paper identities the optimal contracting arrangement and the circumstances under which simple ownership contracts over ratings implement this optimal solution. We place ourselves in a setting where the decision to obtain a rating is endogenous and where the cost of such a piece of information is a strategic variable (a price) chosen by a rating agency. We then show that clients hiding their ratings can only be an equilibrium outcome if they are sufficiently uncertain of their quality at the time of hiring a certification intermediary and if the decision to get a rating is not observable. For somedistribution functions of clients' qualities, a competitiverating market is a necessary condition for this result toobtain. Competition between rating intermediaries willunambiguously lead to less information being revealed inequilibrium.Key Words: Certification, Corporate Governance.Jel Classification: D23, D82, G34, L15

Suggested Citation

  • Eloïc Peyrache & Lucia Quesada, 2007. "(Corporate Governance Series 003) The Ownership of Ratings," FMG Discussion Papers dp590, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp590
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    File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmgdps/dp590%20Corporate%20Governance%20at%20LSE%20003.pdf
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    Keywords

    certification; corporate governance.jel classification: d23; d82; g34; l15;
    All these keywords.

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