Investor-Paid Credit Ratings and Conflicts of Interest

Credit ratings provide information regarding a company’s default probability.  Ratings are relied upon extensively in regulation and private contracting and play a crucial role in the functioning of the capital markets.  However, since the major credit rating agencies (CRAs) operate under a business model whereby they are paid by their issuers, there is reason to believe that issuer-paid ratings are inflated.  Many market observers view this conflict of interest as a contributing factor of the global recession of 2008-2009.  This indictment has also allowed for the emergence of several CRAs that operate under an alternative “investor-pays” business model, which some … Read more