Revolving Doors on Wall Street
Indiana University Bloomington - Kelley School of Business
Kimberly Rodgers Cornaggia
American University - Kogod School of Business; Indiana University Bloomington - Department of Finance
University of Texas at Dallas - Naveen Jindal School of Management
March 22, 2013
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, G32working papers series
Date posted: September 23, 2012 ; Last revised: March 25, 2013
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