The economics of the debt markets
This dissertation contains three essays on the economics of the debt markets. In essay 1, I investigate whether reputation concerns curb conflicts of interest in rating industry by comparing solicited ratings and unsolicited ratings. I find that both agencies give significantly lower ratings to unsolicited issues controlling for public information. However, no significant difference is found in the ex post performance between the two groups conditional on initial ratings. The results suggest that reputation concerns do curb conflicts of interest in the rating industry. Holding public information constant, issuers with better private information self-select into the soliciting group because by disclosing the private information to the agencies they can receive better ratings. In essay 2, we investigate potential conflicts of interest between special servicer and other investors in securitization using data on 357 CMBS deals. In particular, we find that when holding the first-loss piece, special servicers are less likely to transfer delinquent loans to special servicing, and are more likely to liquidate loans. Initial bond pricing analysis further confines that the market values this incentive enhancing structure. However, in deals with severe delinquency problems, we find evidence for conflicts between senior and junior securities holders. In essay 3, we examine the quality of fine ratings in measuring credit risk using a comprehensive sample of all defaults of Moody's rated bonds between 1982 and 2002. Our main finding is that there is a significant difference among fine rating groups in both default rates and loss at default. On average, bonds with rating modifier 1 have a lower default rate and smaller loss at default than bonds with rating modifier 2, and similarly, bonds with rating modifier 2 have a lower default rate and smaller loss at default than bonds with rating modifier 3.
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