Non-Rating Revenue and Conflicts of Interest

55 Pages Posted: 20 Sep 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: September 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 detailed panel data set on the use of non-rating services, and the associated payments, in India, to test to what extent this conflict affects credit ratings. Rating agencies rate issuers that hire them for non-rating services 0.3 notches higher (than agencies that are not hired for such services). Also, within rating categories, default rates are higher for firms that have paid for non-rating services. Both these effects are larger the larger the amount paid for non-rating services is. These results suggest that issuers which hire agencies for consulting services receive higher ratings despite not having lower credit risk.

Keywords: agency problems, Credit ratings, issuer-pays

JEL Classification: G20, G24, G28

Suggested Citation

Baghai, Ramin and Becker, Bo, Non-Rating Revenue and Conflicts of Interest (September 2016). CEPR Discussion Paper No. DP11508. Available at SSRN: https://ssrn.com/abstract=2840705

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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