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Non-rating revenue and conflicts of interest

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  • Becker, Bo
  • Baghai, Ramin

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

  • Becker, Bo & Baghai, Ramin, 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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    More about this item

    Keywords

    Credit ratings; Agency problems; 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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