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Certifiers contribute to the sound functioning of markets by reducing a symmetric information. They, however, have been heavily criticized during the 2008-09 financial crisis. This paper investigates on which side of the market a monopolistic profit-maximizing certifier offers his service. If the seller demands a rating, the certifier announces the product quality publicly, whereas if the buyer requests a rating it remains his private information. The model shows that the certifier offers his service to sellers and buyers to maximize his own profit with a higher share from the sellers. Overall, certifiers increase welfare in specific markets. Revenue shifts due to the financial crisis are also explained.

We provide a comparison of salient organizational features of primary markets for foreign government debt over the very long run. We focus on output, quality control, information provision, competition, pricing, charging, and signaling. We find that the market setup experienced a radical transformation in the recent period, and we interpret this as resulting from the rise of liability insurance provided by rating agencies. Underwriters have given up their former role as gatekeepers of liquidity and certification agencies to become aggressive competitors in a new Speculative Grade market., info:eu-repo/semantics/published

This paper analyzes alternative models for emerging sovereign ratings. Although a small number of economic fundamentals explain ratings reasonably well, variations in those economic fundamentals are themselves explained by a small number of world factors. On the other hand, global financial variables associated with risk aversion are additionally required in order to explain the significant spread compression at the end of 2006. To determine whether ratings matter for spreads, the paper compares results across different methodologies, in particular exploiting differences in opinion between rating agencies. The evidence from this and previous methodologies is that ratings do matter. Finally, the paper finds that global indicators of risk aversion have become less important for emerging market spreads and that the effect of sub-prime news is less than the effect of 'average news' on emerging economy credit default swap (CDS) spreads.

If rating agencies add no new information to markets, their actions are not a public policy concern. But as rating changes may be anticipated, testing whether ratings add value is not straightforward. This paper argues that ratings and spreads are both noisy signals of fundamentals and suggest ratings add value if, controlling for spreads, they help explain other variables. The paper additionally analyzes the different actions (ratings and outlooks) of the three leading agencies for sovereign debt, also considering the differing effects of more or less anticipated events. The results are consistent across a wide range of tests. Ratings do matter and hence how the market for ratings functions may be a public policy concern.

Generally, information provision and certification have been identified as the major economic functions of rating agencies. This paper analyzes whether the “watchlist" (rating review) instrument has extended the agencies' role towards a monitoring position, as proposed by Boot, Milbourn, and Schmeits (2006). Using a data set of Moody's rating history between 1982 and 2004, we find that the overall information content of rating action has indeed increased since the introduction of the watchlist procedure. Our findings suggest that rating reviews help to establish implicit monitoring contracts between agencies and borrowers and as such enable a finer partition of rating information, thereby contributing to a higher information quality.

In this paper, we propose a model of credit rating agencies using the global games framework to incorporate information and coordination problems. We introduce a refined utility function of a credit rating agency that, additional to reputation maximization, also embeds aspects of competition and feedback effects of the rating on the rated firms. Apart from hinting at explanations for several hypotheses with regard to agencies' optimal rating assessments, our model suggests that the existence of rating agencies may decrease the incidence of multiple equilibria. If investors have discretionary power over the precision of their private information, we can prove that public rating announcements and private information collection are complements rather than substitutes in order to secure uniqueness of equilibrium. In this respect, rating agencies may spark off a virtuous circle that increases the efficiency of the market outcome.