The issuer-pay rating model and rating inflation: evidence from corporate credit ratings Public Deposited

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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.
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  • 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
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Place of publication
  • Chapel Hill, NC
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  • Open access
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