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How contractual agreement affects CRA incentives and rating biases

Author

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  • Kittiphod Charoontham

    (Faculty of Business Administration and Accountancy, Khon Kaen University, Khon Kaen, Thailand; Consumer Insights in Sports or Service-Related Business Research Unit, Faculty of Sports Science, Chulalongkorn University, Bangkok, Thailand)

  • Kessara Kanchanapoom

    (Faculty of Management Science, Silpakorn University, Phetchaburi, Thailand)

  • Jirawat Worakantak

    (Faculty of Business Administration and Accountancy, Khon Kaen University, Khon Kaen, Thailand)

Abstract

This study investigates if a rating-contingent or performance-contingent contract can better discourage credit rating agencies (CRAs) from disclosing biased ratings, resulting in mitigation of the capital market liability of foreignness (CMLOF). The model considers the reputational loss from issuing uninformative ratings and CRAs’ unobservable conduct in inflating and deflating ratings. The exerted effort and rating disclosure policies decided by the CRA are unobservable publicly. Findings depict that the CRA under the rating-contingent contract may put no effort and inflate ratings in a favorable market while the performance-contingent contract provides stronger incentives for CRAs to exert optimal effort in generating informative ratings and disclosing them truthfully. By adopting this incentive-based contract, foreign firms can demonstrate a commitment to truthfulness and transparency, distancing themselves from the entrenched practices of credit rating production, which are under scrutiny. This alleviates CMLOF and enables foreign firms to compete effectively when entering international markets. JEL classification : G24, G28, D82, D86

Suggested Citation

  • Kittiphod Charoontham & Kessara Kanchanapoom & Jirawat Worakantak, 2026. "How contractual agreement affects CRA incentives and rating biases," Australian Journal of Management, Australian School of Business, vol. 51(3), pages 891-913, August.
    • Handle: RePEc:sae:ausman:v:51:y:2026:i:3:p:891-913
    DOI: 10.1177/03128962251345627
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    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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