An analysis on the reputation of credit rating agencies

Abstract

Financial markets are often complex and at times, people cannot always comprehend nor able to access certain information. Credit rating agencies were created to solve a part of this problem and act as a bridge between companies and investors. Therefore, in theory, the role of credit rating agencies is a very important one in the context of investment since they are a point of reference to many individual and institutional investors. However, in practice, things are far from ideal. Given the weight that credit rating agencies carry, there were some instances where they may have not acted in the best interests of the end users of their assessments. In this dissertation, reference will be made to the 2008 global financial crisis and seeks to find how their actions in the years leading to the crisis affected their reputation. This will be done through a survey which was conducted for the purpose of this dissertation. The survey asks local asset managers and financial analysts on their reliance, frequency of usage, and trust relating to credit rating agencies especially when considering their past behaviour. Furthermore, reference to external reports will be made, in particular, studies which analysed the reaction of both the investors and the credit rating agencies after specific reputational shocks. The researcher of this dissertation concludes that whenever credit rating agencies are caught out giving inflated ratings, more investors lose trust in their assessments. On the other hand, the rating agencies have strategies in place to restore back their reputation such as issuing more downgrades. Nonetheless, although the participants of the survey agree that rating agencies can fully restore their reputation, there are still mixed feelings on whether these agencies will be trustworthy in the future as will be seen in the survey’s analysis. Hence, this paves the way for future research, which is recommended in this dissertation, to further analyse the behaviour of investors and the credit rating agencies, especially in light of the regulations that are being imposed on them.