Ambiguity and the Equity of Rating Systems: United States Brokerage Firms, 1995–2000

This paper challenges the suggestion in prior research on rating systems, and categories more generally, that such systems help facilitate exchange by providing information and distinguishing between different products, proposing that in some instances they create ambiguity instead. I hypothesize that ambiguity in a rating organization's classification system increases with the number of conflict-of-interest relationships it has with producers of the products it rates. Using the rating systems of over 100 U.S. brokerage firms between 1995 and 2000 as a setting, I find that as levels of underwriting increase, so too does the ambiguity of the brokerage firm's rating system. The result is a market for classification based on choices of the market intermediaries rather than the attributes of rated objects themselves.