75 where the reputation risk of detection is low. They argue that CDOs are a likely candidate for rating inflation, because such securities have a large proportion of investors that solely rely on CRAs for their credit analysis. One of the most well-known processes that give rise to credit rating risk is rating shopping: issuers can influence the disclosed credit rating of their securities by only reporting the most optimistic rating after obtaining preliminary ratings fmr oomd e lmaunldt i pt hl ee ‘CwRi An ns .e Rr -at taiknegs -smh oo ps tp’ ifnege mi s oedneal bs laepdp bl i ye dt hi ne t‘hi ses ur aetri-npga mi d a’ rbkuesti. nTehs es ii ss ss uu ee rr -sp, na iodt wb iut shisnt ea snsd imn go dt he al tma et at hn es st ahma te tthi me ei ntchoemi ret aosfk Ci sR tAos oi bs j eg cetni ve er al yt erda t fer tohme sI sescuuerri tsi ec sa ni s ss uo el idc ibt yc rt he de istarma tei ni sgssu be yr smi nuol tridpel er fCoRr Ai nsvaens tdo mr s at ko er et hl yeos ne tphuebslei cr aotni nl yg si f. trhe ce ey i svoe sd ae smi r ae r. kTehdel yC RhAi g, hwehr i uc hp firsosnetl ef ce tee ad nbdy at hl seo i sasnu oe nr gt oo ipnugbpl iacyl ymreant et , awshe iclue rti ht ye, discarded CRAs only receive a minor contract-breaking fee (see, e.g., Flynn & Ga nh ei nnct e, 2n 0t i1v 8e ; t Go rf iaf cf ii nl i teatt ea l f. ,a 2v o0 r1a3b; l He er aetti na gl . s, 2( s0e1e6 F; lZyhnonu &e tGahl e. , n2t0, 12 70 )1. 8S;oS, aCnRgAi os rhgai veet al., 2009; Skreta & Veldkamp, 2009). The same result is achieved when issuers et hneg acgr ee di int vreasttimn ge nptr obcaensks s) , taos atrhreayn gaer et hl iekier l ys etcou rpiot isesse s( swkhni cohwilne cdlgued eosf mt h ae nraagt ii nn gg algorithms of the CRAs (see, e.g., Griffin et al., 2013). To reduce the rating bias and si me l pe lcet mi v ee ndti srcel og us ul arteo, rSya ndgi si oc lrogsi uarned rSepqautitr (e2m0e1n7t)s saui gmg ee ds t at ht ar te dp uo cl iicnyg- mt haek eorpsaschi toyu ol df correspondence between issuers and CRAs related to the selection process. Ne set xa tb tl ios ht he ed sv tarsat nbdoi dnyt ho ef lpi tuebr lai ct ua rt ieo pn es r ot ani nr iant igntgo schr eo dp ipt i rnagt i tnhge rr ies ki s, wa nh oi ct hh ef or cwu es el l s- on the concept of rating catering. Griffin and Tang (2012) find that from 1997 to 2007 model-implied differences in AAA tranche size on average were 10.5% Chapter 3 - Security Design and Credit Rating Risk
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