Fees, Reputation and Information Production in the Credit Rating Industry
53 Pages Posted: 23 Dec 2015 Last revised: 8 Jun 2018
Date Written: May 30, 2018
What is the best way to harness a credit rating agency's reputational concerns? We examine an agency's incentives to acquire costly information and assign ratings that reflect this information under different compensation schemes. We find that, relative to the case in which the agency is paid conditional on assigning a favorable rating, a policy requiring issuers to pay the agency irrespective of the ratings assigned may reduce the agency's incentives to acquire information and result in less informative ratings. However, if a regulator monitors information acquisition, then upfront fees always result in more informative ratings.
Keywords: Credit Rating Agencies, Information Acquisition, Reputation
JEL Classification: D82, D83, G24
Suggested Citation: Suggested Citation