Rating Agencies: Is There an Agency Issue? Roy C. Smith and Ingo Walter

54 Pages Posted: 3 Nov 2008

See all articles by Roy C. Smith

Roy C. Smith

New York University (NYU) - Department of Finance

Ingo Walter

New York University - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance

Date Written: October 2001

Abstract

This paper examines the potential for conflicts of interest in the debt ratings business. Inherent in the current business model is the fact that firms whose obligations are rated by the agencies pay fees for those ratings, which in turn comprises virtually all of the revenues of the rating agencies. Given the public nature of the ratings, no other business modelseems feasible for rating agencies as commercial ventures, so that conflicts of interest are inherent in this important part of the financial markets infrastructure. This paper examines the nature of this conflict, how it is managed, and the significance of market structure and reputation in preventing conflict exploitation. These issues are linked to the use of ratings for regulatory certification purposes, as well as the international dimensions of debt ratings activity through investments and joint ventures of the major rating groups.

Suggested Citation

Smith, Roy C. and Walter, Ingo, Rating Agencies: Is There an Agency Issue? Roy C. Smith and Ingo Walter (October 2001). NYU Working Paper No. FIN-01-003, Available at SSRN: https://ssrn.com/abstract=1294460

Roy C. Smith (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212 998 0719 (Phone)

Ingo Walter

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY 10012
United States
212-998-0707 (Phone)
212-995-4220 (Fax)

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

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