Losing funds or losing face? Reputation and accountability in the credit rating industry

Martin Angerer, Matthias Herrmann-Romero and Wiebke Szymczak

Journal of Economic Dynamics and Control, 2022, vol. 143, issue C

Abstract: Despite widespread criticism, credit ratings continue to be commissioned and paid for by the firms they ought to scrutinize, raising concerns about the reliability of these issuer-paid ratings. We use an experiment to evaluate whether financial reputation concerns can effectively alleviate rating inflation and find that they are only partially sufficient to discipline rating agencies. However, introducing accountability mechanisms into the rating process effectively reduces rating inflation and almost extinguishes it in our model. Our results emphasize that financial reputation and accountability are important but different factors, which combined can effectively alleviate rating inflation and therefore provide a powerful mechanism of control over rating agencies.

Keywords: Conflict of interest; Rating agencies; Reputation; Accountability; Experiment (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:143:y:2022:i:c:s016518892200224x

DOI: 10.1016/j.jedc.2022.104520

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