Evaluating proposed remedies for credit rating agency failures

S. Jane Jollineau, Lloyd J. Tanlu, Amanda Winn

Research output: Contribution to journalArticlepeer-review


Regulators and the financial press have criticized credit rating agencies (CRAs) for exacerbating the financial crisis by providing overly optimistic debt ratings. Allegedly, CRAs departed from their quantitative models in order to please security issuers with higher credit ratings. In response, the Dodd-Frank Act of 2010 required the Securities and Exchange Commission to conduct a study on alternative models for compensating CRAs. We conduct an experiment exploring how the credit ratings of M.B.A. students, who assume the role of credit rating analysts, are affected by two proposals for reform: (1) changing who pays the CRAs, and (2) requiring analysts to justify departures from a quantitative model. We find that credit ratings are highest when the borrower pays CRAs for ratings and a justification requirement is not in place. Implementing either proposed reform independently reduces credit ratings, but credit ratings are not further reduced when both reforms are implemented together.

Original languageEnglish (US)
Pages (from-to)1399-1420
Number of pages22
JournalAccounting Review
Issue number4
StatePublished - Jul 1 2014
Externally publishedYes


  • Conflict of interest
  • Credit ratings
  • Dodd-Frank Act
  • Justification

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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