Disclosure in Markets for Ratings

We study the implications of the disclosure regime of ratings on the level of information released to the public. Specifically, we compare mandatory and voluntary disclosure. We analyze a model where the potential issuers are initially endowed with homogeneous soft information about their values before paying to acquire ratings. We find that for every accuracy level of the issuers’ initial information, voluntary disclosure results in a more informative equilibrium than mandatory disclosure. This finding identifies a dimension in which the existing European Union regulations that impose the mandatory disclosure of ratings may lead to a loss of information to the public.