Competition among Debt Rating Agencies

Professors Bo Becker (Harvard) and Todd Milbourn (St. Louis) have conducted a new study examining the impact of competition on the performance of credit rating agencies (S&P, Moody, Fitch). They discovered that increases in competition tend to be associated with higher ratings. Moreover, they found that competition tends to reduce the correlation between credit ratings and bond yields. In short, it seems as though companies use enhanced competition to shop for good credit ratings. Fitch's emergence as a more prominent competitor plays a big role in the study. Presumably, their effort to gain market share, coupled with the two major players' efforts to rebuff Fitch's advances, leads to friendlier ratings for debt issuers. The study provides useful guidance for policymakers, as they try to improve the information available to investors in the debt and equity markets. Some policymakers have presumed that competition would increase rating quality/accuracy, but Becker and Milbourn question whether that will indeed be the case.