The spectacular collapse of structured financial products, which were given top ratings by the Credit Rating Agencies in the last financial crisis, brought back the debate regarding the importance and relevance of these agencies and their so-called “issuer pays” business model. This paper shows, from a game theoretical perspective, the influence of Credit Rating Agencies on firm investment. This is done through a signalling game involving cheap talk. The model outlines three key variables that affect firm investment: (1) the bias of the firm regarding its value, (2) the bias of the Credit Rating Agency regarding a firm’s value, and (3) the cost of credit rating. These variables have a significant effect on communication between the players in this game and thus, by extensions, on firm investment.

Bijkerk, S.H.
hdl.handle.net/2105/34809
Business Economics
Erasmus School of Economics

Chatel, G. (2016, August 26). The Credit ratings Game and Its Effect on Firm Investment. Business Economics. Retrieved from http://hdl.handle.net/2105/34809