Thursday, October 25, 2018, 01:15pm - 03:30pm
Yixiao (Ethan) Jiang, Rutgers University (Graduate Student) (*Note change in time)
"Heterogeneity in Shared-ownership and Rating Inﬂation: Evidence from a Semiparametric Model"
Abstract: This paper develops a semiparametric, ordered-response model of credit rating in which ratings are equilibrium outcomes of a stylized cheap-talk game. The proposed model allows the assigned rating probability to be an unknown function of multiple indices permitting ﬂexible interaction, non-monotonicity, and non-linearity in marginal eﬀects. Based on Moody’s rating data, I use the estimated model to examine credit rating agencies’ (CRAs) incentive to bias ratings when the CRA’s shareholders invest in bond issuers. I ﬁnd the degree of Moody’s rating bias varies signiﬁcantly for bothrating categories as well as the institutional cross-ownership between Moody’s and the bond issuer. To obtain the statistical signiﬁcance of these results, I prove a U-statistics equivalence result that is important for showing asymptotic normality for a large class of semiparametric models.