Revolving Doors on Wall Street
Kimberly Rodgers Cornaggia
American University - Kogod School of Business
University of Texas at Dallas - Naveen Jindal School of Management
June 1, 2015
Journal of Financial Economics (JFE), Forthcoming
Credit analysts often leave rating agencies to work at firms they rate. We use benchmark rating agencies as counterfactuals to measure rating inflation in a difference-in-differences framework and find that transitioning analysts award inflated ratings to their future employers before switching jobs. We find no evidence that analysts inflate ratings of other firms they rate. Market-based measures of hiring firms’ credit quality further indicate that transitioning analysts’ inflated ratings become less informative. We conclude that conflicts of interest at the analyst level distort credit ratings. More broadly, our results shed light on the economic consequences of “revolving doors”.
Number of Pages in PDF File: 55
Keywords: Credit Ratings, Capital Markets Regulation, Human Capital, Regulatory Capture, Revolving Door, Credit Analysts, NRSROs, Analyst Labor Market
JEL Classification: G14, G24, G28, G32
Date posted: September 23, 2012 ; Last revised: June 3, 2015
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