Credit rating inflation in the post-financial crisis era: conflict of interests or changed conditions

Abstract

Credit Rating Agencies (CRAs) have been criticized for persistently assigning inflatedratings. Aiming to limit such behaviour, following the 2008/09 crisis, regulators imposed new rules on CRAs. In this paper, I show that, in the post-financial crisis era, rating inflation and investors perception are, on average, non-existent. Evidence shows poor credit quality and time drives rating inflation, but investors fail to perceive it. I also uncover CRAs greater competition’s dual effect: leads to inflation, while investor slink monitoring to reduced inflation. Lastly, I expose that issuers benefiting the most from inflation are more likely to issue bonds within three months, whilst dismissing investors’ perception.