The Performance Disclosures of Credit Rating Agencies: Are They Effective Reputational Sanctions?

67 Pages Posted: 11 Feb 2011 Last revised: 16 Mar 2011

Lynn Bai

University of Cincinnati - College of Law

Date Written: December 1, 2010

Abstract

The SEC has recently added new provisions to the credit rating agency regulation. These provisions require credit rating agencies to disclose publicly their rating actions and performance measurements. The new requirements seek to achieve two goals: (1) deter conflicts of interest in the credit rating industry by invoking the reputational sanction power of performance statistics, and (2) help new entrants to the industry build a track record so they can compete with established agencies. This paper reveals empirical evidence that the current disclosure requirements cannot achieve these goals and makes recommendations on how the regulation should be improved in light of consumer choice research and cognitive science findings on effective communication.

Keywords: credit rating agency, disclosure, conflict of interest, reputational sanction

JEL Classification: K2, C1

Suggested Citation

Bai, Lynn, The Performance Disclosures of Credit Rating Agencies: Are They Effective Reputational Sanctions? (December 1, 2010). New York University Journal of Law and Business, Fall 2010; U of Cincinnati Public Law Research Paper No. 11-03. Available at SSRN: https://ssrn.com/abstract=1758946

Lynn Bai (Contact Author)

University of Cincinnati - College of Law ( email )

P.O. Box 210040
Cincinnati, OH 45221-0040
United States
513-556-0194 (Phone)

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