Did Credit Rating Agencies do good work Essay Example | Topics and Well Written Essays - 2500 words

Did Credit Rating Agencies do good work - Essay Example Data is collected from secondary sources considering the importance of statistical data for reaching a conclusion. A proper analysis and evaluation is done to understand the findings of the study and indicate the key factors underlying the report. Introduction-Background The essential role of the Credit Rating Agencies have been particularly highlighted during the period of global economic crisis in 2008 which affected even the strongest economies in the world. The Credit Rating Agencies essentially served the main purposes of mitigating the asymmetrical information system existing in the markets between the investors and the businesses in requirement of financing modes, bringing a solution for the collective action issues existing in the market and solving the major agency problems existing in the economies. After the global financial crisis of 2007-2009 affecting all the economies of the world, it was stated by many researchers that the financial system followed in the GCC countrie s were much more equipped to cope with the economies following the conventional financing systems. The financial crisis of 2008 proved that the Credit Rating Agencies are not full proof in predicting the defaults that may occur in the market in future and the over dependence on the credit rating Agencies can be considered as one of the primary reasons underlying the cause of the global financial disruption. The Credit Rating Agencies, though regarded as powerful institutions have several drawbacks like information asymmetry and conflict of interest which often have negative impacts on the businesses and the economy has a whole. The effect that the global financial crisis had on the creditworthiness of the various economies throughout the world is depicted below: (Source: International Monetary Fund 2) Literature Review Credit Rating Agencies are regarded as influential institutions which can impact the market and the survivor of the companies and economies by influencing the directi on and working of the market through their effective rating mechanisms. But there exist debatable views on the actual effect of the Credit Rating Agencies on the market where some researchers have pointed out the Credit Rating Agencies more effectively react to the occurring of the events in the market than anticipate the events. The role of the Credit rating Agencies is critical for an economy which was especially reflected during the global financial crisis in 2008. The anticipatory or follower roles of Credit Rating Agencies are critical from the viewpoint of financial stability of a country or an economy. If the Credit Rating Agencies play an anticipatory role in the market, the ratings given by them are critical for influencing the financial stability and the policies in the economy. Conversely, if the Credit rating Agencies are only followers of the events in the market, then their ratings and actions do not have major impact and only end up reflecting the condition of the mar ket and the information gathered from the market events (Kiff, Nowak and Schumacher 159). There are many theories proposed over time relating to the role of the Credit rating Agencies as influential institutions in the normal as well as crisis situations prevailing in the economies. The major theories presented