DP5432 The Ownership of Ratings

Author(s): Antoine Faure-Grimaud, Eloïc Peyrache, Lucía Quesada
Publication Date: December 2005
Keyword(s): certification, corporate governance
JEL(s): D23, D82, G34, L15
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5432

Standard & Poor's provides corporate governance ratings to firms who can, upon learning those, decide to reveal them or not to the market. This paper identifies the circumstances under which such a simple ownership contract over ratings can emerge as the optimal arrangement. Firms 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 some distribution functions of firms' qualities, a competitive market is a necessary condition for this result to obtain. Competition between rating intermediaries will unambiguously lead to less information being revealed in equilibrium.