Does the conflict of interest matter for credit ratings? The impact of the client’s economic importance and the CRA tenure

Yi-Ping Liao, Kuei-Fu Li and Shengmin Hung

Asia-Pacific Journal of Accounting & Economics, 2017, vol. 24, issue 3-4, 302-322

Abstract: We investigate whether the potential conflict of interest affects credit ratings. Based on US data, we find that: (1) the client’s economic importance is positively related to credit ratings, and impairs the rating accuracy, and (2) at first, the credit rating (rating accuracy) increases (decreases) in the early years of the CRA-client relationship, but when the length of the engagement relationship gets longer enough, the CRA tenure is negatively (positively) related to the credit rating (rating accuracy). Overall, it suggests that the CRAs’ contention that the conflict of interest has been well-managed does not appear to be convincing.

Date: 2017
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DOI: 10.1080/16081625.2016.1157024

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Asia-Pacific Journal of Accounting & Economics is currently edited by Yin-Wong Cheung, Hong Hwang, Jeong-Bon Kim, Shu-Hsing Li and Suresh Radhakrishnan

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