Advertisement-Financed Credit Ratings

Heidrun Hoppe-Wewetzer and Christian Siemering

No 14735, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper investigates the incentives of a credit rating agency (CRA) to generate accurate ratings under an advertisement-based business model. We study a two-period endogenous reputation model in which the CRA can choose to provide private effort in evaluating financial products in each period. We show that the advertisement-based business model may provide sufficient incentives to improve the precision of signals when the CRA has an intermediate reputation. Furthermore, we identify conditions under which truthful reporting is incentive compatible.

Keywords: Credit rating agencies; Rating precision; Information acquisition; Advertisement; Reputation (search for similar items in EconPapers)
JEL-codes: D82 G24 L15 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-fmk, nep-mic, nep-ore and nep-rmg
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Journal Article: Advertisement-financed credit ratings (2022)
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