Revolving Doors on Wall Street

55 Pages Posted: 23 Sep 2012 Last revised: 3 Jun 2015

Jess Cornaggia

Pennsylvania State University - Department of Finance

Kimberly Rodgers Cornaggia

Pennsylvania State University - Department of Finance

Han Xia

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: June 1, 2015

Abstract

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”.

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

JEL Classification: G14, G24, G28, G32

Suggested Citation

Cornaggia, Jess and Cornaggia, Kimberly Rodgers and Xia, Han, Revolving Doors on Wall Street (June 1, 2015). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2150998 or http://dx.doi.org/10.2139/ssrn.2150998

Jess Cornaggia

Pennsylvania State University - Department of Finance ( email )

University Park, PA 16802
United States

HOME PAGE: http://jesscornaggia.com

Kimberly Rodgers Cornaggia (Contact Author)

Pennsylvania State University - Department of Finance ( email )

306 Business Bldg
University Park, PA 16802
United States
814-865-2243 (Phone)
814-865-3362 (Fax)

Han Xia

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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