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American Economic Review: Vol. 101 No. 3 (May 2011)

AER Volume. 101, Issue 3 | Previous ArticleNext Article

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Credit Ratings Accuracy and Analyst Incentives

Article Citation

Bar-Isaac, Heski, and Joel Shapiro. 2011. "Credit Ratings Accuracy and Analyst Incentives." American Economic Review, 101(3): 120-24.

DOI: 10.1257/aer.101.3.120

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.

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Authors

Bar-Isaac, Heski (NYU)
Shapiro, Joel (U Oxford)

JEL Classifications

G01: Financial Crises
G21: Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
G24: Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies
G28: Financial Institutions and Services: Government Policy and Regulation
G32: Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure