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Title: Detecting conflicts of interest in credit rating changes : a distribution dynamics approach
Authors: Lee, WC
Shen, J 
Cheong, TS
Wojewodzki, M
Issue Date: 2021
Source: Financial innovation, 2021, v. 7, 45
Abstract: In this study, we compare the adjustments of credit ratings by an investor-paid credit rating agency (CRA), represented by Egan-Jones Ratings Company, and an issuer-paid CRA, represented by Moody’s Investors Service, vis-à-vis conflict of interest and reputation. A novel distribution dynamics approach is employed to compute the probability distribution and, hence, the downgrade and upgrade probabilities of a credit rating assigned by these two CRAs of different compensation systems based on the dataset of 750 U.S. issuers between 2011 and 2018, that is, after the passage of the Dodd–Frank Act. It is found that investor-paid ratings are more likely to be downgraded than issuer-paid ratings only in the lower rating grades, which is consistent with the argument that investor-paid agencies have harsher attitudes toward potentially defaulting issuers to protect their reputation. We do not find evidence that issuer-paid CRAs provide overly favorable treatments to issuers with threshold ratings, implying that reputation concerns and the Dodd–Frank regulation mitigate the conflict of interests, while issuer-paid CRAs are more concerned about providing accurate ratings.
Keywords: Conflict of interest
Credit ratings
Distribution dynamics
Investor-paid credit rating agencies
Issuer-paid credit rating agencies
Publisher: Springer
Journal: Financial innovation 
EISSN: 2199-4730
DOI: 10.1186/s40854-021-00263-z
Rights: © The Author(s), 2021. Open Access This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article’s Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article’s Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http://
The following publication Lee, W.C., Shen, J., Cheong, T.S. et al. Detecting conflicts of interest in credit rating changes: a distribution dynamics approach. Financ Innov 7, 45 (2021) is available at
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