The issuer-pay rating model and rating inflation: evidence from corporate credit ratings Public Deposited
- Last Modified
- March 21, 2019
- Creator
-
Xia, Han
- Affiliation: Kenan-Flagler Business School
- Abstract
- I demonstrate that the issuer-pay rating model adopted by major credit rating agencies contributes to their incentives to issue inflated ratings. Employing a unique dataset, I compare credit ratings based on the issuer-pay rating model to those based on the investor-pay model. I find that when the expected payoff is high, the issuer-pay based rating agencies assign a more favorable rating to the issuer. Additionally, I present evidence that neither regulators nor investors seem to adjust for this rating bias. These findings raise questions about the effectiveness of credit ratings as a gauge of issuers' credit quality. They also indicate that regulators' efforts to promote a more transparent rating process will increase information production in the credit rating industry and benefit investors who use ratings to guide their investment decisions.
- Date of publication
- August 2011
- DOI
- Resource type
- Rights statement
- In Copyright
- Note
- "... in partial fulfillment of the requirements for the degree of Doctor of Philosophy in the Kenan-Flagler Business School (Finance).
- Advisor
- Fulghieri, Paolo
- Degree granting institution
- University of North Carolina at Chapel Hill
- Language
- Publisher
- Place of publication
- Chapel Hill, NC
- Access
- Open access