55 Pages Posted: 23 Sep 2012 Last revised: 3 Jun 2015
Date Written: June 1, 2015
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: 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
By Han Xia