Events

We document that global credit rating agencies have tightened corporate credit ratings worldwide and the trend parallels the growth of rating agencies’ market shares. An increase in the market share precedes a decline in credit ratings and the tightening trend reverses in regions where a local rating agency obtains NRSRO status. Further supporting the notion that market power strengthens rating agencies’ reputational incentives, we find that rating agencies’ market shares are associated with pessimistic qualitative rating adjustments. We also find that rating agencies are more likely to issue false warnings of corporate defaults when their market shares are higher. In addition, the tightened ratings result in a decrease in firm’s future leverage and access to public bond markets. Overall, our findings suggest that market power of global rating agencies can lead to unduly stringent corporate ratings that restrict borrowers’ access to capital.