Did Credit Rating Agencies Make Unbiased Assumptions on CDOs?

We compare key CDO assumptions from two departments within the same rating agency but with different financial incentives. Assumptions made by the ratings division are more favorable than those by the surveillance department. The differences are not explained by collateral switching during the ramp-up period, a long time gap between reports, nor the collapse of the CDO market in 2007 Additionally, CDOs rated with more favorable assumptions by the ratings group were more likely to be subsequently downgraded. As the useful signals from the surveillance group were seemingly ignored, these findings suggest rating agencies bias towards high ratings.

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A hard nut to crack: Regulatory failure shows how rating really works

Competition & Change ◽

10.1177/1024529419833870 ◽

2019 ◽

Vol 23 (3) ◽

pp. 266-286 ◽

Cited By ~ 1

Author(s):

Giulia Mennillo ◽

Timothy J Sinclair

Keyword(s):

Financial Crisis ◽

Credit Rating ◽

Global Financial Crisis ◽

Third Party ◽

Credit Rating Agencies ◽

Private Goods ◽

Rating Agencies ◽

Rating Agency ◽

Before And After ◽

The Global Financial Crisis

Credit rating agencies such as Moody’s and Standard & Poor’s are key players in the governance of global financial markets. Given the very strong criticism the rating agencies faced in the wake of the global financial crisis 2008, how can we explain the puzzle of their survival? Market and regulatory reliance on ratings continues, despite the shift from a light-touch to a mandatory system of agency regulation and supervision. Drawing on the analysis of rating agency regulation in the US and the EU before and after the ﬁnancial crisis, we argue that a pervasive, persistent and, in our view, erroneous understanding of rating has supported the never-ending story of rating agency authority. We show how treating ratings as metrics, private goods, and independent and neutral third-party opinions contributes to the ineffectiveness of rating agency regulation and supports the continuing authoritative standing of the credit rating agencies in market and regulatory practices.

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Management Forecast Optimism During Credit Watch and Credit Rating Agencies’ Disciplinary Role

Journal of Accounting Auditing & Finance ◽

10.1177/0148558x20922721 ◽

2020 ◽

pp. 0148558X2092272

Author(s):

Kai Wai Hui ◽

Alfred Zhu Liu ◽

Yao Zhang

Keyword(s):

Conflict Of Interest ◽

Credit Rating ◽

Earnings Forecasts ◽

Credit Rating Agencies ◽

Voluntary Disclosures ◽

Rating Agencies ◽

Rating Agency ◽

Management Forecast ◽

New Evidence

This study investigates management forecast optimism and credit rating agencies’ role in disciplining opportunistic managerial disclosures in the setting of credit watch reviews. Our analysis shows that managers are generally more likely to issue earnings forecasts and to optimistically bias their forecasts during credit watch periods than in non-watch periods. However, their forecast optimism declines when the rating agency involved has a stronger incentive or ability to monitor, such as when it has low conflict of interest or less difficulty detecting bias in disclosures. In such cases, the rating agency is more likely to penalize managers’ watch-period forecast optimism via unfavorable watch resolutions. Our study provides new evidence on opportunistic voluntary disclosures during credit-related events and credit rating agencies’ monitoring role (or lack thereof) in disciplining misrepresentation in voluntary disclosures.

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Credit Ratings Accuracy and Analyst Incentives

The American Economic Review ◽

10.1257/aer.101.3.120 ◽

2011 ◽

Vol 101 (3) ◽

pp. 120-124 ◽

Cited By ~ 46

Author(s):

Heski Bar-Isaac ◽

Joel Shapiro

Keyword(s):

Financial Crisis ◽

Credit Rating ◽

Credit Ratings ◽

Incentive Contracts ◽

Revolving Door ◽

Credit Rating Agencies ◽

Bank Profitability ◽

Rating Agencies ◽

Rating Agency

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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