The Information Content of Credit Ratings: Compensation Structure Does Matter

By: Jess Cornaggia, The Kelley School Of Business At Indiana University |

Direct excerpts and conclusions:

We exploit an investor-paid credit rating agency’s designation as an NRSRO in 2007 to disentangle competing explanations for the information content of credit ratings. We find the investor-paid agency produces ratings that are more timely and symmetric compared to those produced by a traditional, issuer-paid agency. These differences are significant before and after the investor-paid agency received the NRSRO designation, suggesting they are a result of the raters’ different compensation structures rather than the government certification. Our results indicate that although the recent Dodd-Frank legislation mitigates the importance of the NRSRO designation, the designation itself is less important than the source of rater compensation. More broadly, our results provide unique insights into the relevance of government certification.

Valentina Bruno and Kimberly J. Cornaggia, the Kogod School of Business at American University,
Jess Cornaggia, the Kelley School of Business at Indiana University,
November 2011.
J. Cornaggia is the corresponding author.


The Information Content of Credit Ratings Compensation Structure Does Matter