Rating deflation versus inflation: On procyclical credit ratings

Yao, Zhiyong; Gu, Dingwei; Chen, Yongmin

doi:10.1016/j.pacfin.2016.12.003

Cited by 14 publications

(4 citation statements)

References 17 publications

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“…Verrecchia (1983) and Jung and Kwon (1988) found that financial managers who privately observe information about financial products may have incentives to withhold unfavorable information and reveal only favorable information. When information asymmetry and conflicts of interest exist in the market, and when information production is costly, credit rating agencies (CRA) have also been shown to strategically provide ratings which sometimes do not match exactly with what they have learned about the products (Bolton et al , 2012; Charoontham and Amornpetchkul, 2018; Yao et al , 2017). Fulghieri et al (2013) considered a dynamic two-period model of the credit rating process, incorporating CRAs’ reputational concerns.…”

Section: Literature Reviewmentioning

confidence: 99%

Startup accelerator analysis: strategic decision on effort exertion and information disclosure regime

Charoontham

Amornpetchkul²

2022

JEEE

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Purpose This study aims to investigate a startup accelerator’s decisions toward exerting effort in an information acquisition process and selecting an information disclosure strategy. In particular, the authors are interested in examining which factors may cause the accelerator to report more or less accurate information, which will subsequently affect the investment decision and the outcome of the ventures. This study examines the impact of the equity share taken by the accelerator on the effort level being exerted in the information acquisition process, as well as the accelerator’s decision on the information disclosure regime. Design/methodology/approach The authors use mathematical models built upon well-established theoretical and practical concepts to analyze the research problems and derive the findings. Findings The authors show that when the accelerator takes a sufficiently large equity share from the entrepreneur in exchange for admitting the entrepreneur’s venture into the acceleration program, the accelerator is motivated to exert a significant level of effort to observe an accurate signal for the quality of the venture, and then disclose the information about the venture’s quality consistently with the observed signal (informative disclosure regime). On the other hand, if the accelerator takes a small equity share, it is optimal for her to exert no effort in the information acquisition process and simply adopt the basic disclosure regime, where the accelerator reports the quality of the venture based solely on the ex ante expected payoff of the venture, regardless of the observed signal. Practical implications The results indicate that an equity sharing scheme, which awards a sufficient amount of equity to the accelerator, can be an effective tool to help obtain accurate information about the quality of a startup venture and make a well-informed investment decision. Originality/value This research illustrates that the ownership stake of the accelerator can potentially indicate the accuracy of the information about the venture provided by the accelerator to outside investors. That is, when the stake held by the accelerator is large, the investors can conjecture that the information about the venture reported by the accelerator may be highly accurate and reliable. In contrast, if the accelerator holds a small stake, then it is likely that the information provided by the accelerator may not add any value to the publicly available information. These insights can guide investors (e.g. angle investors, venture capitalists, etc.) in making well-informed startup investment decisions.

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Section: Literature Reviewmentioning

confidence: 99%

Startup accelerator analysis: strategic decision on effort exertion and information disclosure regime

Charoontham

Amornpetchkul²

2022

JEEE

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“…an economy-wide shock) in the revenue function of CRAs and the cost function of the regulator. According to [ 1 ], we replace the common shock with economic cycles in the article. Actually, economic cycles have an effect on corporate bond ratings, which lead to the changes of the demand for bond ratings and the regulatory cost.…”

Section: The Modelmentioning

confidence: 99%

“…In the present paper, we only discuss the available conditions of the dual rating incentives and the constraint regulations to prevent rating inflation in view of the long-term perspective. According to [ 1 ], we can discuss rating inflation from the short-term perspective. Additionally, we will consider other measures, such as banks’ internal ratings and will provide more empirical evidence in further research.…”

Section: Conclusion and Research Prospectmentioning

confidence: 99%

“…After the 2008 sub-prime crisis and the 2009 European debt crisis, credit rating agencies (CRAs) have been accused of assigning intentionally inflated ratings, i.e., giving good ratings to bad issuers [ 1 ]. For example, CRAs provided the highest rating AAA to the American International Group (AIG), but excessive speculation in the financial products caused the failure of AIG’s parent company in 2008.…”

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Incentive and constraint regulations of rating inflation in collusion over the separation of economic cycles - Markov rating shopping dual reputation model

Zhou

Tian

Zhang³

et al. 2018

PLoS ONE

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Economic cycles may lead to changes in corporate bond credit ratings. This paper utilizes the Markov model to describe transition probability matrixes of economic states for the separation of economic cycles. We develop a new model, which we term the Markov rating shopping dual reputation model, incorporating two reputation effects. This model is well suited to analyze the conditions of the dual rating incentive regulation and the constraint regulation for preventing rating inflation in collusion among credit rating agencies. Then, we apply the Markov regime switching-vector auto-regression (MS-VAR) to estimate the transition probability matrixes of America, England, Japan and China. Based on the numerical analysis and the simulations, the results show that a dual rating regulation can prevent the collusion of inflated ratings, as well as increased rating fees with the separation of economic cycles; additionally, when separating the economic cycles, a constraint regulation is more effective at reducing the risk of rating inflation in collusion and regulatory cost.

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Credit rating agencies and the state: an inter-field regulated relationship

do Nascimento,

Neto

2024

Theor Soc

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Rating deflation versus inflation: On procyclical credit ratings

Cited by 14 publications

References 17 publications

Startup accelerator analysis: strategic decision on effort exertion and information disclosure regime

Startup accelerator analysis: strategic decision on effort exertion and information disclosure regime

Incentive and constraint regulations of rating inflation in collusion over the separation of economic cycles - Markov rating shopping dual reputation model

Credit rating agencies and the state: an inter-field regulated relationship

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