Working Paper

Can Reputation Ensure Efficiency in the Structured Finance Market? Majority Voting: A Quantitative Investigation

Abstract: In Elamin (2013), the credit rating agency (CRA) cannot credibly fully reveal its information about the quality of a rated structured finance project, when ratings are unverifiable. Can the fear of losing its reputation discipline the CRA? In this paper, there is incomplete information about the type of the CRA. With some probability, it can be a truthful type, always fully revealing its information. At every period, the (updated) probability that the CRA is of the truthful type is its reputation. With only two project types and when the CRA?s reputation is high enough, an informationally efficient equilibrium, where investors are fully informed, exists. With more than two project types, no matter how high the CRA?s patience level or its reputation, there is no informationally efficient equilibrium. The many-project-types case is clearly the relevant case; therefore, I conclude that the fear of losing a reputation is not enough of a deterrent in the structured finance market

Keywords: Credit Rating Agencies; Conflicts of Interest; Reputation;

JEL Classification: D8; G2;

https://doi.org/10.26509/frbc-wp-201441

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers (Old Series)

Publication Date: 2015-01-07

Number: 1441

Note: Suggested citation: Elamin, Mahmoud, 2014. “Can Reputation Ensure Efficiency in the Finance Market?” Federal Reserve Bank of Cleveland, working paper no. 14-41