Credit Ratings Accuracy and Analyst Incentives

Bar-Isaac, Heski and Shapiro, Joel (2011) Credit Ratings Accuracy and Analyst Incentives. The American Economic Review, 101 (3). pp. 120-124.

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.

Item Type: Article
Keywords: analysts; credit rating; credit rating agency monitoring
Subject(s): Finance
Date Deposited: 08 May 2012 09:51
Last Modified: 10 Nov 2015 14:59
URI: http://eureka.sbs.ox.ac.uk/id/eprint/3483

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