Conference Agenda

Prior studies view investors as passive recipients of credit ratings who make portfolio decisions accordingly. In this paper, we identify circumstances in which institutional investors act as “rating-movers”, strategically shaping rating outcomes to favor their portfolio positions and managerial compensation. Using a proprietary dataset of Collateralized Loan Obligations (CLOs), we examine the incentives of CLO managers to resist rating downgrades that could trigger overcollateralization (OC) test failures. We develop a novel measure capturing managers’ incentives to suppress downgrades, based on the significance of a loan within a manager’s portfolio and the extent to which its downgrade would affect OC compliance. We find that loans facing greater resistance from CLO managers exhibit a significantly lower likelihood of subsequent downgrades. This effect is more pronounced for loans issued by private firms and when managers are approaching their incentive fee hurdles, highlighting the economic motivation behind the rating influence. Our results demonstrate that investors, much like fixed-income issuers, can exert strategic pressure on rating agencies, revealing a new source of conflicts of interest in the credit rating industry.

This paper examines the role of repo lending between counterparties affiliated with the same bank holding company (BHC). Using confidential transaction-level data, we find that Treasury repo rates between affiliated entities are significantly higher than those between unaffiliated parties. This affiliation premium is more pronounced when dealers face tighter balance sheet constraints, suggesting that regulatory capital requirements raise the cost of external borrowing and enhance the value of internal funding. During a temporary period of regulatory relief—when leverage requirements were relaxed—the affiliation premium nearly disappeared, only to re-emerge once the regulations were reinstated. Our findings underscore a unique competitive advantage for dealers within large BHCs: the ability to access internal liquidity from affiliated banks. This internal liquidity channel also facilitates the distribution of liquidity from banks with high level of reserves to the rest of financial system.