How Issuer-pay Model and Competitive Pressure affect the Credit Rating Industry and Policy Alternatives Suggestion

초록

Purpose: The sound development of the capital market requires addressing the conflict of interest inherent in the issuer-payer model of credit rating agencies (CRAs) and mitigating the inaccuracy of the rating. The purpose of this study is to explore how to improve the issuer-payer model in CRA and examine whether increasing competition can contribute to enhancing the accuracy of credit ratings. Design/methodology/approach: To achieve the purpose of this paper we study a similar case in the auditor industry and build a theoretical model to investigate the impact of new CRA entry on evaluation quality. Findings: Our theoretical model shows that simply increasing competition, such as introducing new entrants, can paradoxically lower the quality of evaluations. In addition, just as the designated auditor system improved the independence of auditor reports, credit rating agencies may also be able to improve the independence of their evaluations if a designated system is partially introduced. Research limitations/implications: We make a policy recommendation to mitigate conflicts of interest by designat-ing a single CRA under the current multi-agency evaluation system. Originality/value: This study is the first to establish a theoretical model on the impact of new CRA entry on evaluation quality under economies of scale in information production. © The Author(s).

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