Abstract
The recent spate of failures of bond rating agencies to detect and report on the financial distress of their clients has led to extensive efforts by the federal government to improve the regulation of this industry. Regulators want the bond ratings industry to uncover downgrades in a timely manner so that investors can better assess the risks associated with their investments. In this paper we study three distinct financial scenarios and find that when there are multiple bond rating agencies rating the same issue, rating agencies provide investors with more accurate and/or more timely information about the riskiness of the rated debt issue. In the case of new bond issues, we find evidence to support increased competition among bond rating agencies leading to more accurate pricing at the time of the bond issuance. In the case of corporate restatements and recognition of bond defaults, competition among rating agencies leads to the more timely recognition of both unintentional restatements and default. We provide evidence to suggest that expanding the number of rating agencies is an effective alternative to the increased regulation of rating agencies.
Published Version
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