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It is [a] scandal that the model of payment for the credit rating agencies has not been changed. They should be paid by agents for the buyers not by the sellers.
Martin Wolf, Financial Times.
The Securities and Exchange Commission (SEC) sanctioned investor-paid rating agency Egan-Jones for falsely stating that it did not know its clients’ investment positions. The SEC’s action against Egan-Jones raises the broad question whether knowledge of clients’ investment positions creates a conflict of interest for investor-paid ratings. In an experimental setting, we find that investor-paid rating agencies are likely to assign credit ratings that are biased in favor of their clients’ positions, and that this effect is attenuated when the rated company has a sophisticated investor base that is expected to scrutinize ratings. The effect is not conditional on the risk profile of the rated companies. Taken together, our findings suggest that a conflict of interest stemming from investors’ preferences is likely to bias ratings under investor-pays business models, but scrutiny by the company’s investor base can counteract this bias.
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- Investor-Paid Ratings and Conflicts of Interest
- Springer Netherlands
Journal of Business Ethics
Print ISSN: 0167-4544
Elektronische ISSN: 1573-0697
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