Conflict of Interest in Investor-paid Credit Ratings

26 Pages Posted: 27 Oct 2021

See all articles by Nima Fazeli

Nima Fazeli

PSB Paris School of Business

Date Written: July 27, 2020

Abstract

This paper investigates whether an investor-paid credit rating model leads to rating inflation.
Using the corporate bond ratings of Egan-Jones Rating Company, I find evidence that an investor-paid rating agency tends to upgrade bonds that offer a higher yield.
This suggests that an investor-paid rating agency can cater to the needs of the investors who reach for yield, allowing them to bypass capital requirements of holding such bonds.
This result supports the theory that rating-contingent regulations in financial markets create incentives for inflated ratings, regardless of compensation structure of rating agencies.

Keywords: rating-based regulations, reaching for yield, credit ratings

JEL Classification: G18, G24, L43, L51

Suggested Citation

Fazeli, Nima, Conflict of Interest in Investor-paid Credit Ratings (July 27, 2020). Available at SSRN: https://ssrn.com/abstract=3951376 or http://dx.doi.org/10.2139/ssrn.3951376

Nima Fazeli (Contact Author)

PSB Paris School of Business ( email )

59 rue Nationale
Paris, 75013
France

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
211
Abstract Views
549
Rank
264,087
PlumX Metrics