Managerial Incentives to Influence Credit Ratings Through Financial Reporting

• In Event: Credit Ratings

Abstract

We develop a model featuring an owner-manager who aims to raise capital from a perfectly competitive debt market. The manager discloses a financial report and then has the option to purchase credit ratings from strategic rating agencies. We show that the manager may balance rating information quality (weakening his misreporting incentives) with rating favorability (strengthening his misreporting incentives) depending on the institutional environment. Our investigation highlights that two institutional properties – the level of competition in the credit rating market and investor regulation using credit ratings – are essential in codetermining managerial incentives for using financial reporting to influence credit ratings. The paper derives a number of novel insights and implications for regulators as well as empirical research.

Authors

• Kyungha Lee, Rutgers University

• Stefan Schantl, The University of Melbourne