Fees, Reputation and Information Production in the Credit Rating Industry

53 Pages Posted: 23 Dec 2015 Last revised: 8 Jun 2018

Jacopo Bizzotto

University of Oslo - Department of Economics

Adrien Vigier

University of Oxford - Department of Economics

Date Written: May 30, 2018

Abstract

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

Bizzotto, Jacopo and Vigier, Adrien, Fees, Reputation and Information Production in the Credit Rating Industry (May 30, 2018). Available at SSRN: https://ssrn.com/abstract=2707069 or http://dx.doi.org/10.2139/ssrn.2707069

Jacopo Bizzotto (Contact Author)

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway

Adrien Vigier

University of Oxford - Department of Economics ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom

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