Did Credit Rating Agencies do good work Research Paper

Did Credit Rating Agencies do good work - Research Paper Example This part of the study suggested why the credibility of credit rating agencies came into the scrutiny. Following that, a detailed study was done regarding the agency costs and its effects on the value of a company. It was seen that, agency cost mostly arises due to the principal agent problem. The principal agent problem is nothing but the situation that is characterized by a conflict of interest between the principal and the agent who are the managers and the shareholder respectively. This conflict of interests leads to agency costs and thereby decreases the value of a firm. Thereafter, the information asymmetry and its implications on the financial services industry have been explained. It has been seen that this factor has led to severe economic downturns in the recent times. One such example was the 2007-08 financial crises where huge extent of information asymmetry existed between the financial institutions and their potential investors which acted as a catalyst triggering the f inancial crisis. The following sections explained the reason for the credit crunch and its implications in the economy of Qatar. It was reported that Qatar was expected to be resilient to the global financial crisis. Thereafter a final conclusion has been provided. ... Credit Rating agencies played a critical role by certifying most of the CDO tranches created by financial institutions with investment grade ratings that assured the potential investors about their safety. Furthermore, CDO tranches appealed more to the investors particularly because they offered higher returns compared to the similarly rated corporate bonds. The ratings which were certified to those CDOs appealed to the investors who assumed that the ratings represent a general and vigorous indication of default risks (Griffin & Tang, 2011). However, the rating based approach failed completely in the year 2007-08 with the collapse of the CDO market. In fact the ratings were such inappropriately done that some of the triple-A rated CDO tranches lost 90% of their value and were consequently downgraded as junk (Wojtowicz, 2013). This idea will serve as the ground work of this research. The following sections will explain the involvement of the credit rating agencies in the 2007-08 globa l financial crisis and comments will be made regarding the credibility of these agencies. These facts will be related to agency costs and the effects of such agency cost on the value of the firm will be explained. Thereafter, another topic that will be described in detail is information asymmetry and its consequences in the financial markets. Finally the reasons for the credit crunch and its implication on Qatar’s economy will be discussed followed with a conclusion. Credit Rating Agencies and the financial crisis The rapid development of the international financial markets over the last two decades would have been impossible without the credit rating agencies.