In the wake of the 2007-2008 financial crisis, a main criticism of credit rating agencies (CRAs) has been that they produced biased ratings that led investors to overvalue structured financial products. Aside from regulatory concerns, biased ratings only have direct detrimental effects on the economy if investors know the ratings and use them to make investment decisions. Nevertheless, economic theory suggests that investors might not look at ratings during business cycle peaks if demand for idiosyncratic information decreases when aggregate returns increase. In general, we don't know what information investors have; often the best we can do is infer their information from trading actions. This inference is imprecise and does not indicate the source of the information. In order to evaluate the economic importance of CRAs and other information producers, we need to know more about what determines demand for their product. This dissertation research aims to (1) construct a unique direct measure of information acquisition from an information producer and (2) use this measure to identify the determinants of demand for information.
The primary sources for this research are the credit report records of the Mercantile Agency. Founded in 1841, the Agency was one of the first mercantile credit-reporting firms and, along with its main competitor, J.M. Bradstreet & Company, established the system on which modern credit rating is based. Wholesalers subscribed to the service to gain information on the credit quality of their trading partners. The credit reports cover merchants for almost the entire United States between 1850 and the mid-1880s. A sample of the reports will be collected from the R.G. Dun & Company Credit Report Volumes, located in the Baker Library Historical Collections at the Harvard Business School. The main variable for this dataset will be a feature of the credit reports that has yet to be exploited by any scholars: indications of how many subscribers inquired about each report.
These data will support two main research projects about how subscribers acquired information. If we assume that subscribers used the credit reports to make trading decisions, they should only have inquired after a report if they expected the information to impact their decisions. The first project will empirically identify the economic conditions under which subscribers acquired the most information. The preliminary evidence based on a small sample suggests that subscribers acquired information counter-cyclically. If this finding holds more generally, it implies that information was less valuable in boom periods relative to bust periods. The second project will investigate what types of firms the Mercantile Agency reported on relative to the entire market and how this supply changed over time. If the Agency learned about its subscribers' preferences over time, it should have improved at predicting the information its subscribers would find useful. Hence, the development of supply can shed light on the characteristics of firms for which credit reporting was most valuable.
By studying the credit reports of the Mercantile Agency, this research will further our understanding of how people acquire information and the economic significance of the institutions that produce information. This research will contribute to the literature in economics on costly information acquisition by providing a direct measure of acquisition and contribute to the literature on the history of the Mercantile Agency by studying a key component of how the company operated.
