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FIIE-2: Credit Ratings
Reputations and Credit Ratings - Evidence from Commercial Mortgage-Backed Securities
Stockholm School of Economics
We examine a quasi-experimental setting where a rating agency (S&P) was completely shut out of a large segment of the commercial mortgage-backed securities (CMBS) market for more than one year, following a procedural mistake. Exploiting the fact that most CMBS tranches have ratings from multiple agencies, we show that S&P subsequently eased its standards, in particular for large deals and for deals from important issuers. The results suggest that issuing optimistic ratings is a strategy that a rating agency with a weak reputation can use to gain market share in a market with strong competition.
Bank Standalone Credit Ratings
1Western University; 2University of Zurich; 3Bank for International Settlements
Do bank stock prices react to credit rating changes unrelated to default risk? On July 20, 2011, Fitch Ratings refined their bank standalone ratings that measure intrinsic financial strength. But this move from a 9- to a 21-point scale did not affect bank all-in ratings, which measure default risk by combining standalone ratings with assessments of extraordinary sovereign support. Hence, these unexpected refinements should have an impact on bank shareholders but not on bank creditors. We indeed find that banks receiving positive rating surprises saw their stock prices outperform other banks` stocks, without any changes to credit default swap spreads.
Information Sharing and Lender Specialization: Evidence from the U.S. Commercial Lending Market
1Northwestern University; 2Queen Mary University of London; 3Massachusetts Institute of Technology
We examine how information sharing affects lender specialization. Using the introduction of a U.S. commercial credit bureau, we document that lenders use their comparative advantage in lending to enter new markets after joining the bureau. We exploit the staggered joining of members to show that a lender’s specialization responds to information shared by other members joining the bureau, but only after the lender itself has become a member. Small lenders account for the majority of geographic and industry expansion, while large lenders increase their exposure to small firms. After joining the bureau, contract default rates are lower and less volatile, suggesting that the portfolio changes we document reduce lender risk. Our results help rationalize why intermediaries regularly forego rents when voluntarily sharing information, and document how information asymmetries can hinder expansion.
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Conference: EFA 2017
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