Abstract

http://ssrn.com/abstract=2002186
 
 

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The Issuer-Pays Rating Model and Ratings Inflation: Evidence from Corporate Credit Ratings


Han Xia


University of Texas at Dallas - Naveen Jindal School of Management

Günter Strobl


Frankfurt School of Finance & Management

February 2012


Abstract:     
This paper provides evidence that the conflict of interest caused by the issuer-pays rating model leads to inflated corporate credit ratings. Comparing the ratings issued by Standard & Poor's Ratings Services (S&P) which follows this business model to those issued by the Egan-Jones Rating Company (EJR) which adopts the investor-pays model, we demonstrate that the difference between the two is more pronounced when S&P's conflict of interest is particularly severe: firms with more short-term debt, a newly appointed CEO or CFO, and a lower percentage of past bond issues rated by S&P are significantly more likely to receive a rating from S&P that exceeds their rating from EJR. However, we find no evidence that these variables are related to corporate bond yield spreads, which suggests that investors may be unaware of S&P's incentive to issue inflated credit ratings.

Number of Pages in PDF File: 44

Keywords: Corporate credit ratings, Issuer-pays rating model, Ratings inflation

JEL Classification: D82, G24

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Date posted: February 10, 2012 ; Last revised: September 22, 2012

Suggested Citation

Xia, Han and Strobl, Günter, The Issuer-Pays Rating Model and Ratings Inflation: Evidence from Corporate Credit Ratings (February 2012). Available at SSRN: http://ssrn.com/abstract=2002186 or http://dx.doi.org/10.2139/ssrn.2002186

Contact Information

Han Xia (Contact Author)
University of Texas at Dallas - Naveen Jindal School of Management ( email )
P.O. Box 830688
Richardson, TX 75083-0688
United States
Günter Strobl
Frankfurt School of Finance & Management ( email )
Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany
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