The Importance of Conflicts of Interest in Attributing Sovereign Credit Ratings

47 Pages Posted: 12 Feb 2015 Last revised: 10 Aug 2016

See all articles by Oscar Bernal

Oscar Bernal

University of Namur - Center for Research in Finance and Management (CeReFiM)

Alexandre Girard

University of Namur; Saint-Louis University, Brussels

Jean-Yves Gnabo

University of Namur

Date Written: June 13, 2015

Abstract

Credit Rating Agencies (CRAs) have been in the regulator's spotlight since the subprime crisis occurred and they remain under criticism due to suspected conflicts of interest that could arise from clients soliciting a rating. The aim of this paper is to contribute to the current discussion on regulatory failures in CRAs' activities by testing the existence of a bias in CRAs' assessment due to conflict of interest. More speciffcally, we examine whether the solicitation of a rating by a sovereign affects the grade provided by rating agencies. Our empirical results, which are based on a two-step ordered probit for a large set of emerging and industrialized countries, address the issue of self-selection bias for ratings attributed by Standard & Poor's in 2013 and suggest that unsolicited ratings are higher than solicited ones, which goes against the traditional argument of conflict of interest, namely the "blackmail" hypothesis, and supports the idea that CRAs attach an important weight to their reputation in attributing sovereign ratings.

Keywords: Credit Rating Agencies, NRSRO, Rating Solicitation, Sovereign Credit Rating, Conflicts of Interest

JEL Classification: G240

Suggested Citation

Bernal, Oscar and Girard, Alexandre and Girard, Alexandre and Gnabo, Jean-Yves, The Importance of Conflicts of Interest in Attributing Sovereign Credit Ratings (June 13, 2015). Available at SSRN: https://ssrn.com/abstract=2563483 or http://dx.doi.org/10.2139/ssrn.2563483

Oscar Bernal

University of Namur - Center for Research in Finance and Management (CeReFiM) ( email )

8 Rempart de la Vierge
Namur, 5000
Belgium

Alexandre Girard

University of Namur ( email )

8, rempart de la vierge
Namur, 5000
Belgium

Saint-Louis University, Brussels ( email )

43 Boulevard du Jardin botanique
Brussels, 1000
Belgium

Jean-Yves Gnabo (Contact Author)

University of Namur ( email )

Rempart de la Vierge, 8
Namur B-5000
Belgium

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