ResearchTalks Vol. 3 - Dependency on rating agencies : Can we trust them?
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This document discusses rating agencies and their influence on markets. It questions whether rating agencies can be trusted given their failures in 2008. While rating agencies provide opinions on debt risk, they are paid by the issuers they rate, creating a conflict of interest. Their ratings have a cascade effect where investors rely heavily on them due to a lack of alternative sources of information. Improving the reliability of ratings will be difficult due to these conflicts and incentives problems.
ResearchTalks Vol. 3 - Dependency on rating agencies : Can we trust them?
- 1. Dependency on rating agencies: can we trust them? Sylvie Focquet March 2012
- 2. Rating agencies have a huge influence on the market …
- 3. …but why are they so powerful?... …but why are they so powerful?... Moody’s headquarter
- 4. …and can we trust them? 2008 Rating agencies hearing
- 5. Companies Low Interest % Investors and states Could you lend me money? Our opinion: “It is good quality debt” Is it risky? Rating agencies What do the rating agencies?
- 6. Companies High Interest % Investors and states Could you lend me money? Our opinion: “It is junk debt” Is it risky? Rating agencies More risk more return.
- 7. Rating agencies give an opinion about the debt risk AAA C
- 8. Who are they? >90% of revenues mostly paid by the corporate issuers
- 9. Why are they so powerful? Insufficient information Legislation Investor Strategy
- 11. Rating agencies Cascade effect Investors Attention danger Debt Debt
- 12. Can we trust them? : Performance? Some big failures… …however they can add value
- 13. Can we trust them? Conflicts of interest Issuer paid Shareholders
- 14. Can we trust them: civil liability? How to distinguish between Bad luck, negligence or bad intent? Who will take the risk to give a different opinion?
- 15. Can we better trust them with investors paid agencies? Who is willing to pay? Some investors …but they can also influence ratings Free rider problem
- 16. Can we better trust them with more competition? I will give more Company can rate-shop nice ratings I will need less info
- 17. How to reduce our dependence? Legislation change Own risk assessment
- 18. What are the alternatives? Market based indicators Accounting ratios Alternatives are Complement not perfect ratings
- 19. Conclusion Improving ratings will be difficult and tricky Having perfect ratings is idealistic We gave too much importance to rating agencies
- 20. Ratings should be only one piece