Non-Rating Revenue and Conflicts of Interest
74 Pages Posted: 4 Apr 2015 Last revised: 17 Nov 2016
Date Written: November 16, 2016
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: Suggested Citation