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Non-rating revenue and conflicts of interest

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  • Baghai, Ramin
  • Becker, Bo

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.

Suggested Citation

  • Baghai, Ramin & Becker, Bo, 2016. "Non-rating revenue and conflicts of interest," CEPR Discussion Papers 11508, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11508
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    Cited by:

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    2. Becker, Bo & Opp, Marcus M. & Saidi, Farzad, 2020. "Regulatory Forbearance in the U.S. Insurance Industry: The Effects of Eliminating Capital Requirements," CEPR Discussion Papers 14373, C.E.P.R. Discussion Papers.
    3. Yalta, A. Talha & Yalta, A. Yasemin, 2018. "Are credit rating agencies regionally biased?," Economic Systems, Elsevier, vol. 42(4), pages 682-694.
    4. Krishnan, Kaveri & Mukherji, Arnab & Basu, Sankarshan, 2020. "Market responses to increased transparency: An Indian narrative," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 663-677.
    5. Leo Tang & Marietta Peytcheva & Pei Li, 2020. "Investor-Paid Ratings and Conflicts of Interest," Journal of Business Ethics, Springer, vol. 163(2), pages 365-378, May.
    6. Guneren Genc, Elif & Deniz Basar, Ozlem, 2019. "Comparison of Country Ratings of Credit Rating Agencies with MOORA Method," Business and Economics Research Journal, Uludag University, Faculty of Economics and Administrative Sciences, vol. 10(2), pages 391-404, April.
    7. Bae, Kee-Hong & Driss, Hamdi & Roberts, Gordon S., 2019. "Does competition affect ratings quality? Evidence from Canadian corporate bonds," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 605-623.
    8. Martijn Boermans & Bram van der Kroft, 2020. "Inflated credit ratings, regulatory arbitrage and capital requirements: Do investors strategically allocate bond portfolios?," DNB Working Papers 673, Netherlands Central Bank, Research Department.

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    More about this item

    Keywords

    agency problems; Credit ratings; issuer-pays;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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