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Solicited Versus Unsolicited Ratings: The Role of Selection

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Document pages: 42 pages

Abstract: This paper analyses the extent to which selection explains the observed discrepancy between solicited and unsolicited ratings. I propose a model of selection with truth telling rating agencies and borrowers with the ability to veto the revelation of the rating. The observed difference between the two categories of ratings in different markets is in line with the prediction of the model. In the financial sector, for example, selection of less creditworthy borrowers into unsolicited status makes unsolicited ratings grades lower on average than those solicited. In the government sector, on the other hand, there is a positive selection of borrowers into unsolicited ratings.

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