Advertisement

Impact of Pay-for-Performance on Rating Accuracy

  • Kittiphod Charoontham
  • Thunyarat Amornpetchkul
Conference paper
Part of the Springer Proceedings in Business and Economics book series (SPBE)

Abstract

This study analyses whether the pay-for-performance scheme can encourage Credit Rating Agencies (CRAs) to issue accurate ratings under an investor-pay model. In our model, a CRA individually sets disclosure rules between biased rating and the full disclosure regime; an investor who solicits ratings, decides to acquire information accuracy. The CRA’s information production cost is compensated by a fixed fee, and incentive pay is tied to the portfolio outcome. Finding shows that the pay-for-performance scheme can efficiently motivate the CRA to adopt the full disclosure regime. Sufficiently high information acquisition level requested by the investor and relatively low incentive pay can induce the CRA to fully disclose rating information. The results reveal how the pay-for-performance scheme and the investor’s decision effectively influence the CRA’s behaviour of selecting rating policy.

Keywords

Credit rating agencies Investor-pay model Pay-for-performance scheme Rating accuracy 

References

  1. Bolton P, Freixas X, Shapiro J et al (2012) The credit ratings game. J Finan 67(1):85–111.  https://doi.org/10.1111/j.1540-6261.2011.01708.xCrossRefGoogle Scholar
  2. Bongaerts D (2013) Can alternative business models discipline credit rating agencies. Working paperGoogle Scholar
  3. Bonsall Iv SB (2014) The impact of issuer-pay on corporate bond rating properties: evidence from Moody׳s and S&P’s initial adoptions. J Account Econ 57(2–3):89–109.  https://doi.org/10.1016/j.jacceco.2014.01.001CrossRefGoogle Scholar
  4. Calomiris CW (2009) The debasement of ratings: what’s wrong and how we can fix it. Economic Policies for the 21st century, 26Google Scholar
  5. Chatterji AK, Toffel MW (2010) How firms respond to being rated. Strateg Manag J 31(9):917–945.  https://doi.org/10.1002/smj.840Google Scholar
  6. Faulkender M, Petersen MA (2006) Does the source of capital affect capital structure? Rev Finan Stud 19(1):45–79CrossRefGoogle Scholar
  7. IOSCO (2008) The role of credit rating agencies in structured finance markets: final report. Available via OICV-IOSCO (International Organization of Securities Commissions). http://www.iosco.org/library/pubdocs/pdf/IOSCOPD270.pdf. Accessed 10 July 2014
  8. Kashyap AK, Kovrijnykh N (2016) Who should pay for credit ratings and how? Rev Financ Stud 29(2):420–456.  https://doi.org/10.1093/rfs/hhv127CrossRefGoogle Scholar
  9. Katz JG, Munoz ES, Stephanou C et al (2009) Credit rating agencies: no easy regulatory solutions. The World Bank Group, Financial and Private Sector Development Vice Presidency, Crisis Response Policy Brief, 8Google Scholar
  10. Kemper KJ, Rao RP (2013) Do credit ratings really affect capital structure? Finan Rev 48(4):573–595.  https://doi.org/10.1111/fire.12016CrossRefGoogle Scholar
  11. Löffler G (2004) An anatomy of rating through the cycle. J Bank Finan 28(3):695–720CrossRefGoogle Scholar
  12. Nwogugu MC (2013) Problems inherent in the compensation and business models of credit rating agencies. Available at SSRN 1761406Google Scholar
  13. Partnoy F (2009) Historical perspectives on the financial crisis: Ivar Kreuger, the credit-rating agencies, and two theories about the function and dysfunction of markets. Yale J Regul 26(2):431–443Google Scholar
  14. Sangiorgi F, Sokobin J, Spatt C (2009) Credit-rating shopping, selection and the equilibrium structure of ratings. Stockholm School of Economics and Carnegie Mellon University. Working paperGoogle Scholar
  15. White LJ (2013) Credit rating agencies: an overview. Annu Rev Finan Econ 5(1):93–122.  https://doi.org/10.1146/annurev-financial-110112-120942CrossRefGoogle Scholar

Copyright information

© Springer International Publishing AG, part of Springer Nature 2018

Authors and Affiliations

  • Kittiphod Charoontham
    • 1
    • 2
  • Thunyarat Amornpetchkul
    • 1
  1. 1.National Institute of Development Administration (NIDA)BangkokThailand
  2. 2.Khon Kaen University International College (KKUIC)Khon KaenThailand

Personalised recommendations