DP12648 Reputations and credit ratings: evidence from commercial mortgage-backed securities

Author(s): Ramin P. Baghai, Bo Becker
Publication Date: January 2018
Date Revised: September 2018
Keyword(s): commercial mortgage-backed securities, Competition, Credit ratings, information quality, reputation
JEL(s): G20, G24, G28
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12648

How do changes in a rating agency's reputation affect the ratings market? We study the dynamics of credit ratings after Standard & Poor's (S&P) was shut out of a large segment of the commercial mortgage-backed securities (CMBS) ratings market following a procedural mistake. Exploiting the fact that most CMBS securities have ratings from multiple agencies, we show that S&P subsequently eased its standards compared to other raters. This coincided with a partial recovery in the number of deals S&P was hired to rate. Our findings are consistent with the view that an agency can regain market share after suffering reputational damage by issuing more optimistic ratings.