How Credible are Credit-rating Agencies?
10/14/2004 — Institutional incentives shape the different roles of contracting (certified) and valuation (non-certified) bond-rating agencies, which in turn, affect various properties of their ratings. ANN ARBOR, Mich. The scandals and failures of major companies, such as WorldCom and Enron, have prompted many in the investment community to blame bond-rating agencies for missing impending meltdowns and not providing investors with timely, useful information. Although some of this criticism may be deserved, recent calls from the financial press and Congress to push approved credit-rating agencies, such as Moody’s Investor Services, to be more responsive to investors may be misguided, according to Catherine Shakespeare of the Stephen M. Ross School of Business at the University of Michigan. “Our results show the incentives of certified bond-rating agencies, or NRSROs (Nationally Recognized Statistical Rating Organizations), differ from those of non-certified agencies,” says Shakespeare,
