research@hec - Issue #6 - (Page VII)

Governance Certification Key ideas: Rating agencies and firms: the attribution of ratings property rights is the attribution of property rights on the score obtained. negligible circumstances, the firm may prefer not to reveal its score. • A central component in the contract established between rating agencies and firms • A rating agency may prefer to let its client choose what to do with this score; in certain, non- GENESIS Some agents are more knowledgeable than others as regards certain markets. Rating agencies, however, are attempting to bridge this gap by varying business models. For example, in 2007, Standard & Poor’s entered the market for corporate governance assessments and proposed a new type of contract comprised of several elements: (1) only the firms — and not investors — would pay to obtain the score, (2) the contract with the company would be kept secret, and (3) the contract would authorize the company to withhold the rating. In the case of certification, the firm’s power to reveal or withhold its rating is one of the specific conditions of ownership. S&P decided to transfer property rights to its customers, allowing them the choice of how to use the information. Notwithstanding, are such procedures optimal on intermediary markets? has a monopoly on certification markets. • Conversely, a rating agency will find it advantageous to maintain ownership of the rating if it M THEORY AND VOLUNTARY INFORMATION SHARING S&P found that some companies never disclose their scores, thus contradicting the “unravelling process” – a standard economic result which predicts that, on the contrary, under certain conditions (in particular, the possibility of transmitting information to the markets in a credible way and at no extra cost), all firms will reveal private information. What does this entail? Imagine that a seller knows the value of an informational asset, and that the buyer values this asset at 100 or 200. Let’s then imagine that the latter — without any additional information — is prepared to pay 150. If the real value is higher than 150, the seller will willingly reveal it, according to the stated conditions. If the seller, on the other hand, discloses nothing, it means the asset is worth less than 150. Thus, buyers will not be willing to pay 150 – perhaps only 125. The unravelling process is then applied, and all scores will eventually be disclosed — the result of which has serious practical implications. This process, however, does not apply to S&P because certain firms keep the information secret. Yet, once they have been informed of their score, they may distribute the information freely. This differs from the standard result when firms have inaccurately assessed their own corporate governance prior to requesting certification. They are therefore likely to make one of two kinds of mistakes: 1) hiring an intermediary when the firm has a low true value, or 2) not BIOGRAPHY Eloïc Peyrache graduated from the Ecole Normale Supérieure in Cachan with an Agrégation in Economics and Management. He also holds a PhD in economics from the Université des Sciences Sociales de Toulouse I. Since 2003, he has been teaching economics at HEC and is academic director of the international management course (particularly through the CEMS exchange network). His current research focuses on contract theory. December - January 2009 • research@hec VII http://www.hec.edu/Faculty/Professors-alphabetical-list/(professor)/Peyrache

Table of Contents for the Digital Edition of research@hec - Issue #6

Contents
Research at HEC: My Opinion
Why CEOs Nearing Retirement are Averse to RiskGovernance Certification
Building Innovation by Strengthening Bridges
Rating agencies and firms: the attribution of ratingsproperty rights

research@hec - Issue #6