DP13418 The Private Use of Credit Ratings: Evidence from Mutual Fund Investment Mandates

Author(s): Ramin P. Baghai, Bo Becker, Stefan Pitschner
Publication Date: December 2018
Date Revised: November 2019
Keyword(s): Credit ratings, delegated asset management, financial crisis, investment mandates
JEL(s): G01, G23, G24
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13418

Credit ratings have been shown to be imperfect and sometimes biased measures of risk. Has this affected their use in unregulated settings? Using textual analysis, we measure the use of credit ratings in investment mandates of fixed income mutual funds, where ratings serve to limit investment in risky assets. We find that this use has steadily increased from high initial levels over the past two decades. Fixed income markets' extensive and continued reliance on credit ratings either points to a lack of practically useful alternatives, a positive view of ratings by market participants, or inefficient contracting.