Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Sunday, January 17, 2010

Listokin & Taibleson on Improving Credit Rating Accuracy

If You Misrate, then You Lose: Improving Credit Rating Accuracy Through Incentive Compensation, by Yair Jason Listokin, Yale Law School, and Benjamin Taibleson, Yale Law School, was recently posted on SSRN.  Here is the abstract:

Credit rating agencies (CRAs) serve many roles in maintaining properly functioning debt markets. Their contribution to both Enron-era financial scandals and the 2008-2010 financial crisis, however, has led to many calls for credit rating reform. This Essay proposes an incentive compensation scheme in which CRAs are paid with the debt they rate. If a CRA overrates debt, then the CRA suffers a financial penalty because the debt the CRA receives as compensation is less valuable than the cash compensation that the debt is replacing. We believe that this reform, though imperfect, would be more likely to generate accurate ratings than other credit rating reform proposals. We also discuss extensions of our basic debt compensation proposal that mitigate some of debt compensation’s weaknesses, though at the cost of greater complexity.

Law Review Articles | Permalink

TrackBack URL for this entry:

Listed below are links to weblogs that reference Listokin & Taibleson on Improving Credit Rating Accuracy:


Post a comment