Does the Percentage of Investment Grades Given by Rating Agencies Impact their Market Share?

Abstract

The credit rating industry has controlled by three core credit rating agencies; Fitch, Moody’s, and S&P that are contributing to financial markets by providing reliable and transparent credit rating information on which stakeholders can rely. These key players could manipulate this information by allocating high percentages of quality ratings just for the sake of increasing their market shares. This research is conducting to examine the impact of assigning the percentage of investment grades given by CRA’s on their market share. This research will attain following objectives: firstly, to identify quality ratings assigned for each set of top banks from UK & USA and categories them yearly; secondly, to examine their market share on the basis of percentage of IG grade given; thirdly, to access the modeling and impacts of the financial crisis on the market share of CRA’s; finally, to determine the relationship between CRA’s market share and percentage of IG given. This research gives a detailed analysis of the percentage of IG assigned by CRA’s and their market share which consists of general analysis and econometric analysis. Moreover, the research methodology is a quantitative method for achieving all research objectives. For general analysis, we make a comparative study to find the impacts of high-quality ratings against their market share and evaluate the growth rate in their market share. Whereas, for econometrics analysis, we regress the market share of CRA’s against the percentage of investment grades given and use lagged variables to understand the changes in market share. Besides, this allows us to find the relationship between CRA’s and the percentage of IG given. Hence, the results from both analyses have exposed that there is a positive correlation between CRA’s market share and the percentage of IG given. It is revealed that there is an increase in the market share of CRA’s on assigning a high percentage of IG given by CRA’s and a negative growth rate shown in market share for those years in which they allocate less number of quality ratings. However, due to financial crisis and adjustment in credit rating standards, there is a general fall in the number of ratings assigned by CRA’s which very influences their market share. Keywords: investment grades; market share; credit rating agencies; financial crisis; modeling of banks ratings.