Credit Rating Agencies - A Theoretical Review

The paper aims at identifying and studying the theoretical works that have been done so far in the area of credit rating agencies (CRAs). The review indicates that the concepts of credit rating services are carved mainly out of four prominent theories; they are, The Information Asymmetry Theory, The Theory of Reputation, The Principal Agent Theory and The Theory of Efficient Markets. This theoretical framework helps us to understand the evolution of CRAs and its impact on Deficit Spending Units and Surplus Spending Units. It also helps us to comprehend the present status of CRAs. The CRAs which came into existence to resolve the information asymmetry got engulfed in the principal agent problems; and lost their reputation. It is also found that they have contributed very minimum to the efficiency of the securities markets.