Conflicts of Interest in Subscriber-Paid Credit Ratings

53 Pages Posted: 21 Oct 2021 Last revised: 8 Apr 2022

See all articles by Samuel B. Bonsall

Samuel B. Bonsall

Pennsylvania State University - Department of Accounting

Jacquelyn Gillette

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Gabriel Pundrich

University of Florida

Eric C. So

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: April 2022

Abstract

We provide the first evidence of systematic bias among an emerging type of credit rating agency that relies on subscriptions from institutional clients as its primary source of revenue. Using data on Egan-Jones (EJR) ratings, a subscriber-paid rating agency, we show that EJR issues more optimistically biased bond ratings, less timely downgrades, and less accurate ratings for bonds held by more EJR clients. Our evidence is consistent with subscriber-paid agencies optimistically biasing their ratings to bolster subscriber revenue, which allows institutional clients to invest in riskier bonds with higher expected returns. Taken together, our findings suggest that the emergence of subscriber-paid rating agencies as an alternative to more traditional issuer-paid agencies is unlikely to resolve problems arising from conflicts of interest, but rather alter the nature of these conflicts in the ratings process.

Keywords: Credit Ratings, Issuer-Pay Model, Subscriber-Pay Model, NRSRO, Information Intermediaries

JEL Classification: G10, G11, G18, G24, G32

Suggested Citation

Bonsall, Samuel B. and Gillette, Jacquelyn and Pundrich, Gabriel and So, Eric C., Conflicts of Interest in Subscriber-Paid Credit Ratings (April 2022). Available at SSRN: https://ssrn.com/abstract=3931024 or http://dx.doi.org/10.2139/ssrn.3931024

Samuel B. Bonsall

Pennsylvania State University - Department of Accounting ( email )

University Park, PA 16802-3306
United States

Jacquelyn Gillette (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Ave. E62-663
Cambridge, MA 02142
United States

Gabriel Pundrich

University of Florida ( email )

PO Box 117165, 201 Stuzin Hall
Gainesville, FL 32610-0496
United States

Eric C. So

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

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