Non-Rating Revenue and Conflicts of Interest

74 Pages Posted: 4 Apr 2015 Last revised: 17 Nov 2016

See all articles by Ramin Baghai

Ramin Baghai

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); Swedish House of Finance

Bo Becker

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); ECGI

Multiple version iconThere are 2 versions of this paper

Date Written: November 16, 2016

Abstract

Rating agencies produce ratings used by investors, but obtain most of their revenue from issuers, leading to a conflict of interest. We employ a unique data set on the use of non-rating services, and the associated payments, in India, to test if this conflict affects ratings quality. Agencies rate issuers that pay them for non-rating services higher (than agencies not hired for such services). Such issuers also have higher default rates. Both effects are increasing in the amount paid. These results suggest that issuers which hire agencies for non-rating services receive higher ratings despite having higher default risk.

Keywords: Credit rating agencies, conflicts of interest, fees, non-rating revenue

JEL Classification: G24, G28, G38

Suggested Citation

Baghai, Ramin and Becker, Bo, Non-Rating Revenue and Conflicts of Interest (November 16, 2016). Swedish House of Finance Research Paper No. 15-06. Available at SSRN: https://ssrn.com/abstract=2589519 or http://dx.doi.org/10.2139/ssrn.2589519

Ramin Baghai (Contact Author)

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Bo Becker

Stockholm School of Economics ( email )

Drottninggatan 98
Dept. of Finance
111 60 Stockholm, 11160
Sweden

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

ECGI ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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