Competition Between Credit Rating Agencies: A Brazilian Point of View

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Claudio Ribeiro de Lucinda, Jan 28, 2014

One of the most important issues in finance and, more specifically, in corporate finance, is the informational problems that plague financial contracting relationships-what information does each party need to know. A sizeable part of the literature on this topic concerns possible mechanisms developed to face these problems-including the best candidates to manage this information, as well as disclosure requirements, different incentive structures, and incentives for information gathering.

It is logical that comparative advantages in collecting information should lead to the emergence of institutions specialized in collecting information on corporate solvency, which then distribute this information in a way easily understood by prospective investors. Among the most important players in this arena, at least in developed financial markets, are the credit rating agencies-institutions that have, as their main objectives, to evaluate the capacity of different debtors to repay funds and provide this information to prospective lenders.

However, in both developed and developing markets, the current industry structure for credit rating agencies is more the result of the interplay of market forces and regulatory fiat than one naturally derived from comparative advantages. This interplay also drives the nature of competition between such entities. The present article provides an example of this thesis, by focusing on the competition between credit rating agencies in Brazil, and new regulations regarding these institutions.