Who Should Pay for Credit Ratings and How?

Anil Kashyap and Natalia Kovrijnykh ()

No 18923, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We analyze a model where investors use a credit rating to decide whether to finance a firm. The rating quality depends on unobservable effort exerted by a credit rating agency (CRA). We study optimal compensation schemes for the CRA when a planner, the firm, or investors order the rating. Rating errors are larger when the firm orders it than when investors do (and both produce larger errors than is socially optimal). Investors overuse ratings relative to the firm or planner. A trade-off in providing time-consistent incentives embedded in the optimal compensation structure makes the CRA slow to acknowledge mistakes.

JEL-codes: D82 D83 D86 G24 (search for similar items in EconPapers)
Date: 2013-03
New Economics Papers: this item is included in nep-ban, nep-cta, nep-mic, nep-ore and nep-reg
Note: CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Published as Anil K. Kashyap & Natalia Kovrijnykh, 2016. "Who Should Pay for Credit Ratings and How?," Review of Financial Studies, Society for Financial Studies, vol. 29(2), pages 420-456.

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Related works:
Journal Article: Who Should Pay for Credit Ratings and How? (2016)
Working Paper: Who Should Pay for Credit Ratings and How? (2013)
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