VGSF - WU Vienna - LC

Itay Goldstein, Wharton Business School

Campus WU D3.0.225 11:00 - 12:30

Organizer VGSF

As part of the ser­ies of the "Fin­ance Re­search Sem­inar", VGSF wel­comes Itay Gold­stein from Whar­ton Busi­ness School to present his re­search pa­per.
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Credit Rat­ing In­fla­tion and Firms’ In­vest­ments

We ana­lyze credit rat­ings’ ef­fects on firms’ in­vest­ments in a ra­tional debt-rollover game that fea­tures a feed­back loop. The credit rat­ing agency (CRA) has an in­her­ent in­cent­ive to in­flate the rat­ing, provid­ing a biased but in­form­at­ive sig­nal to in­vestors. In­vestors’ re­sponse to the rat­ing af­fects the firm’s cost of cap­ital, in­vest­ment de­cision, and credit qual­ity, and this is re­flec­ted in the ini­tial rat­ing. The CRA might re­duce ex-ante eco­nomic ef­fi­ciency, and this comes solely as a res­ult of the feed­back ef­fect of the rat­ing: The CRA un­der­stands the ef­fect of the in­form­a­tion it provides and al­lows more firms to gamble for re­sur­rec­tion. We de­rive em­pir­ical pre­dic­tions on the de­termin­ants of rat­ing stand­ards and rat­ing in­fla­tion, and dis­cuss policy that could po­ten­tially avoid the inef­fi­ciency.

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