Credit Ratings Accuracy and Analyst Incentives
American Economic Review · 2011 · Volume 101 · Issue 3
Abstract
The financial crisis has brought a new focus on the accuracy of credit rating agencies (CRAs). In this paper, we highlight the incentives of analysts at the CRAs to provide accurate ratings. We construct a model in which analysts initially work at a CRA and can then either remain or move to a bank. The CRA uses incentive contracts to motivate analysts, but does not capture the benefits if the analyst moves. We find that rating agency accuracy increases with CRA monitoring, bank profitability (a positive "revolving door" effect), and can be non-monotonic in the probability of an analyst leaving.
Keywords
Financial Crises, Banks, Other Depository Institutions, Micro Finance Institutions, Mortgages, Investment Banking, Venture Capital, Brokerage, Ratings and Ratings Agencies, Financial Institutions and Services: Government Policy and Regulation, Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure
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