Estimating the Costs of Issuer-Paid Credit Ratings

Cornaggia, Jess; Cornaggia, Kimberly Rodgers

doi:10.2139/ssrn.1705843

Cited by 54 publications

(45 citation statements)

References 12 publications

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“…Recent empirical research finds that the issuer-pay system leads to inflated rating standards, with inherent conflicts of interest inducing agencies to favor the interest of their corporate clients (Jiang, Harris and Xie, 2012;Cornaggia and Cornaggia, 2013). Given the issuer-pay system, which operates for both CRAs throughout our sample period, several papers investigate if competition among CRAs has affected rating standards.…”

Section: Macroeconomic Market and Regulatory Factorsmentioning

confidence: 99%

Split Ratings and Differences in Corporate Credit Rating Policy between Moody's and Standard & Poor's

Bowe

Larik

2014

The Financial Review

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This paper investigates split credit ratings awarded by Moody's and Standard & Poor's (S&P) to U.S. corporations. Bivariate probit model estimates, analyzing 5,238 firm‐year observations from dual‐rated S&P 500/400/600 index‐constituent corporations, indicate firm‐specific financial and governance characteristics predict split ratings. Large, profitable companies with enhanced interest coverage, a greater percentage of independent directors, and more institutional investment are less likely to receive splits. Moody's appears more conservative in its evaluations, assigning lower ratings to smaller, less profitable companies with low interest coverage. Moody's also associates external, independent constraints on managerial autonomy with a higher corporate credit standing relative to S&P.

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Section: Macroeconomic Market and Regulatory Factorsmentioning

confidence: 99%

Split Ratings and Differences in Corporate Credit Rating Policy between Moody's and Standard & Poor's

Bowe

Larik

2014

The Financial Review

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“…However, there is evidence that the inherent subjectivity in qualitative analysis reduces the information quality of both corporate credit ratings (Fracassi, Petry, and Tate 2016) and the ratings of structured finance products (Griffin and Tang 2012). Cornaggia and Cornaggia (2013) review and analyze empirically the relative costs and benefits of the qualitative analysis from traditional CRAs vis-a-vis an automated quantitative model.…”

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confidence: 99%

Managerial Ability and Credit Ratings

Cornaggia

Krishnan

Wang

2017

Contemporary Accting Res

134

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We test whether credit rating analysts consider managerial ability as a credit risk factor and find that higher‐ability managers obtain more favorable credit ratings. Controlling for past performance, these results suggest that managerial ability is itself a significant credit rating factor. Cross‐sectional analyses indicate that managerial ability is beneficial specifically in firms facing financial or competitive pressure. We find that high‐ability managers mitigate the adverse impact on ratings of other credit risk factors including negative earnings and low interest coverage. Our results contribute to a growing literature documenting economic benefits to hiring and retaining high‐quality management.

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“…Jiang, Stanford, and Xie (2012) show that rating agencies assign higher credit ratings after switching from the "investor-pays" to the "issuer-pays" business model. Strobl and Xia (2012), Cornaggia and Cornaggia (2013), and Segoviano and others (2015) discuss the conflicts of interest leading to credit rating inflation. More generally, the United States Financial Crisis Inquiry Report concluded that "the failures of credit rating agencies were essential cogs in the wheel of financial destruction."…”

Section: Financial Stability Implicationsmentioning

confidence: 99%