Advertisement-financed credit ratings

Heidrun Hoppe-Wewetzer and Christian Siemering ()
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Christian Siemering: Leibniz University

Journal of Economics and Finance, 2022, vol. 46, issue 1, No 8, 188-206

Abstract: Abstract This paper investigates the incentives of a credit rating agency (CRA) to generate accurate ratings under an advertisement-based business model. To this end, we study a two-period endogenous reputation model in which a CRA can increase the precision of its ratings by exerting effort. The CRA receives a revenue not from rating fees, as is standard in the literature, but through online advertising. We show that the advertisement-based business model provides sufficient incentives for the CRA to improve the precision of signals at intermediate levels of 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: 2022
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Working Paper: Advertisement-Financed Credit Ratings (2020)
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DOI: 10.1007/s12197-021-09562-8

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