Non-rating revenue and conflicts of interest

Bo Becker and Ramin Baghai

No 11508, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Rating agencies produce ratings used by investors, but obtain most of their revenue from issuers, leading to a conflict of interest. We employ a detailed panel data set on the use of non-rating services, and the associated payments, in India, to test to what extent this conflict affects credit ratings. Rating agencies rate issuers that hire them for non-rating services 0.3 notches higher (than agencies that are not hired for such services). Also, within rating categories, default rates are higher for firms that have paid for non-rating services. Both these effects are larger the larger the amount paid for non-rating services is. These results suggest that issuers which hire agencies for consulting services receive higher ratings despite not having lower credit risk.

Keywords: Credit ratings; Agency problems; Issuer-pays (search for similar items in EconPapers)
JEL-codes: G20 G24 G28 (search for similar items in EconPapers)
Date: 2016-09
New Economics Papers: this item is included in nep-ban
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Citations: View citations in EconPapers (3)

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Journal Article: Non-rating revenue and conflicts of interest (2018)
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