Upfront versus rating contingent fees: Implications for rating quality

Saltuk Ozerturk

Finance Research Letters, 2014, vol. 11, issue 2, 91-103

Abstract: This paper theoretically investigates whether compensating a credit rating agency (CRA) with an upfront fee, rather than a rating contingent fee, can improve rating quality. I show that an upfront fee delivers the same rating quality as the rating contingent fee if the CRA sets its rating policy before the issuer solicits a rating, whereas it can potentially improve quality if the rating policy is set only after a rating is solicited. These results suggest that the “Franken Amendment” that has been removed from the Dodd-Frank Act might be crucial for the proposed upfront fee regime to improve rating quality.

Keywords: Credit rating agencies; Up-front fee; Rating contingent fee; Rating accuracy; Strategic rating inflation (search for similar items in EconPapers)
JEL-codes: D82 G24 G28 L14 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:11:y:2014:i:2:p:91-103

DOI: 10.1016/j.frl.2013.11.003

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