Conflicts of interest’s management within credit rating agencies

Cristian Marzavan and Tănase Stamule
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Cristian Marzavan: Academy of Economic Studies, Bucharest
Tănase Stamule: Academy of Economic Studies, Bucharest

Management & Marketing, 2009, vol. 4, issue 3

Abstract: The recent financial crisis triggered by the spectacular drop of the prices of financial instruments backed by subprime loans brought back into spotlight the role played by the credit rating agencies (CRAs) in the structured finance field. Their importance grew exponentially along with financial globalization and received a substantial support from the Basel Committee II whose newest regulations regarding the risks involved by certain financial assets were tied to ratings issued by specialized institutions. Throughout the time, the regulators took appropriate measures to ensure that the problems raised by the rating activity are avoided – loose competition, lack of transparency, potential conflicts of interest and rating-depending regulation. This paper tried to identify the main conflicts of interest which arise in the rating issuance activity and to outline the means that generate the potential incentives to exploit those conflicts; an important weight was put on the „reputational capital†theory which implies the fact that under the right circumstances, a reputation mechanism that works properly will deter low quality ratings. It tried to follow the correlation between the evolution of the legal framework and the impact on ratings quality, looking to identify remedies in order to avoid and remove conflicts of interest for this specific domain. Based on empirical evidence, the influence of conflicts on market informational flow was put under scrutiny and the long term implications on financial market environment were assessed.

Keywords: conflicts of interest; credit rating agencies; information asymmetry; Sarbanes- Oxley Act; subprime crisis. (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:eph:journl:v:4:y:2009:i:3:n:9

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