Type and Duration
FFF-Förderprojekt, January 2022 until December 2022 (finished)Coordinator
Chair in FinanceMain Research
Wealth ManagementDescription
For many decades, Standard & Poor's, Moody's and Fitch have dominated the credit rating indus-try and provided the global financial markets with ratings on the creditworthiness of issuers and their debt. While many investors and policy makers rely on credit ratings agencies (CRAs hereafter) to guide their decisions, the "Big Three" are often accused of being biased in favour of the issuer due to their issuer pays remuneration model. However, persistently biased ratings may erode in-vestors' trust, rendering the credit rating industry obsolete. Advocates of issuer-paid CRAs there-fore emphasize that reputational capital can mitigate the conflict of interest and effectively disci-pline CRAs to publish accurate assessments of an issuer's creditworthiness. Another frequently mentioned control mechanism represents accountability, which is given when rating analysts may be called to justify their decision making and face dissatisfied investor's inquiries.In this project we want to focus on the effects of endogenous reputation and accountability on issuer-paid rating analysts in a competitive environment. To this end, we employ an experimental design to study individual investor, issuer, and credit rating analyst behaviour. First, we want to look at duopolistic rating agency market structure and analyse whether a competitive environ-ment can prevent misreporting. In a second step, we introduce a reputation-based feedback sys-tem that allows investors to evaluate published ratings and analyse whether rating inflation can be mitigated in such an environment. In a third step, we allow for communication between dissatis-fied investors and responsible rating analysts, enabling us to extract the effect of accountability on misreporting.
Principal Investigator
Publications
Angerer, M., Herrmann-Romero, M., & Szymczak, W. (2022). Losing funds or losing face? Reputation and accountability in the credit rating industry. Journal of Economic Dynamics and Control, 143, 1-32. (ABDC_2022: A*; ABS_2021: 3; VHB_3: A)
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