Revolving Doors on Wall Street

Abstract:     
Credit analysts often leave rating agencies to work at firms they rate. These analyst transfers provide a unique laboratory for studying revolving door effects because rating agencies serve a quasi-regulatory role in capital allocation, ratings have economic consequences, and other agencies provide counterfactuals. Moreover, because rating agencies share common objectives, these transitions are less subject to the matching problem faced by other empirical studies of revolving door effects. We use a difference-in-difference approach and find the transitioning analysts become more favorable to their future employers relative to benchmark raters in the year prior to their transitions. We use a KMV model as an alternative benchmark and find the ratings produced by transitioning analysts become less informative over this period. The timing of analyst transitions relative to new debt issues and watch list appearances does not indicate that firms hire their credit analysts to mitigate information asymmetries. Rather, the evidence suggests that analysts are hired to help issuers manage the rating process.

Number of Pages in PDF File: 56

Keywords: Credit Ratings, Capital Markets Regulation, Human Capital, Regulatory Capture, Revolving Door, Credit Analysts, NRSROs, Analyst Labor Market

JEL Classification: G14, G24, G28, G32

working papers series