Abstract: This paper presents the first comprehensive test of whether well-known conflicts of interest at
bond rating agencies importantly influence their actions. This hypothesis is tested against the
alternative that rating agency actions are primarily influenced by a countervailing incentive to
protect their reputations as delegated monitors. These two hypotheses generate a number of
testable predictions regarding the anticipation of credit-rating downgrades by the bond market,
which we investigate using a new data set of about 2,000 credit rating migrations from Moody's
and Standard & Poor's, and matching issuer-level bond prices. The findings strongly indicate
that rating changes do not appear to be importantly influenced by rating agency conflicts of
interest but, rather, suggest that rating agencies are motivated primarily by reputation-related
incentives.
Keywords: Rating agencies, bond market, conflicts of interest, reputation
Full paper (559 KB PDF)
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Last update: January 8, 2004
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