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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.