Credit rating accuracy and incentives
Credit agencies rate the quality of risky debt issued by firms, who themselves pay fortheseratings.Thispaymentstructurecreatesanincentiveproblemwithrespect to rating accuracy. This paper constructs an equilibrium model for studying the efficiency of this payment scheme and its accuracy. We show that this payment scheme increases welfare for the firm’s shareholders but generates inaccurate ratings that accentuate the credit risk business cycle. As the number of rated debt issues grows, however, the payment scheme inefficiency goes to zero and the ratings inaccuracy disappears.
Motivation: The financial viability of a nursing home may have a direct impact on resident’s health and contribute to health disparities. Altman’s Z-Score Bankruptcy Model is used to predict group ...