The fundamental purpose of a theoretical framework is to describe a complex system of interactions that underlie a process or a social organisation. Having reviewed the domain of this study and undertaken a literature review, the phenomena to be explored will now be further clarified. By definition, a theoretical framework is a logically structured representation of concepts, variables and relationships involved in a scientific study with the purpose of clearly identifying what will be explored, examined, measured or described (Kenny et al., 1997). Hence, the theoretical framework in this thesis aims to shape the current study by grounding it in the concepts of notching and tying and relating these concepts to the research questions as suggested by Fisher (2010).
Furthermore, a theoretical framework is also a description of core concepts with latent relationships that cause a phenomenon to occur (Kenny et al., 1997). They [theoretical frameworks] are ultimately propositions to be validated and tested by
95 empirical findings (ibid). In the current study, the theoretical framework has been developed through a structured approach following the literature review and prior to data collection to ascertain if the concepts of notching and tying constitute anticompetitive behaviour and antitrust practices in the credit rating industry. Indeed, designing a theoretical framework using a structured approach of this sort is critical for narrowing the focus of research studies (Fisher, 2010).
Yet, in spite of the importance of theoretical frameworks, Van der Stede (2001:199) contends that there is usually not a strong theoretical precedent for studies published in financial research, hence ‘there is a role for new constructs for which there are no ready-made instruments available from other disciplinary areas’. Consequently, the theoretical framework presented here considers the sparse literature to develop a mechanism to explore the anticompetitive influences of notching and tying. The model makes an argument about why this study matters and demonstrates a connection between the literature review and the real rating process and clarifies the areas in which relationships exist between the literature and the practice. On one hand, the literature is essential for making sense of the events being observed in the industry. On the other hand, the practices in the rating process are important as they shed light on phenomena that have gone unnoticed in the literature on CRAs. Accordingly, the theoretical framework proposed in the current study represents an understanding of the literature, the research problem and the underlying concepts and phenomena being studied. Figure 1.2 illustrates this framework:
96 FIGURE 1.2THEORETICAL FRAMEWORK
Firstly, recalling that the literature suggests that notching and tying are two strategic behaviours by which the Big Three maintain their market position, the theoretical framework therefore presents both behaviours as concepts and as independent variables. Secondly, the literature suggests that the effect of notching and tying on the market structure in the long run is an oligopoly (the dependent variable). However, in the short run both notching and tying influence the motivations of parties in the rating process. These motivations are an intermediate variable that manifest through an anticompetitive behaviour which directly impacts on the dependent variable (Oligopoly). Finally, in keeping an open mind, the theoretical framework also accommodates additional factors in the data that may contribute to the oligopoly or impede new CRAs from entering the market.
Thus, underpinned by the specified theoretical framework, the current study poses several contributions to the academic and professional literature on competition among CRAs. These contributions are:
1. undertaking the first independent empirical study on notching and tying in the credit rating industry,
2. obtaining rare and first-hand empirical data from rating analysts and underwriters on their behaviours in the rating process,
3. offering further evidence on the assumptions made by rating analysts and underwriters in the rating process,
Notching
Anticompetitive
Behaviour Oligopoly
Tying
97 4. providing first hand evidence to policy makers on the interests and strategic
actions of analysts and underwriters in the rating process.
On the first contribution, unlike prior studies by GQR (2002) and Carron et al. (2003), the present study is not supported by any entities with vested interests in the rating process. Hence, the inherent findings are more likely to be interpreted without bias. Secondly, the present study will interview actual actors in the rating process where other studies have relied on panel data and quantitative estimations to understand the rating process. Alternatively, a direct interface with rating analysts and underwriters is crucial to understanding human influences on the phenomena of notching and tying and on competition in the rating industry as a whole. Thirdly, using interview data, the present study will verify and clarify the decision- making process of agents in the rating process. Lastly, concerning the implications for policy makers, an understanding of the rating process matters because CRAs are routinely expected to operate in a strictly rational manner and rarely in their corporate interests. It is somewhat a reasonable but ultimately unrealistic assumption on the part of policy makers to maintain such expectations because strategic behaviours that manifest through notching and tying could be carefully accounted for in policy making. Indeed, the ultimate challenge for policy makers is how to design a rating industry with strategic participants so that the end result is quality credit ratings produced by a competitive ratings industry.