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Moral hazard, skin in the game regulation and CRA performance

Author

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  • Ozerturk, Saltuk

Abstract

This paper investigates the implications of the “issuer skin in the game” regulation for the rating accuracy of a credit rating agency (CRA). The analysis shows that, as well mitigating a moral hazard problem on the issuer's side, skin in the game requirements can also improve the rating accuracy of a CRA involved in the sale. The results also link the accuracy of the CRA's ratings to the severity of the issuer's moral hazard problem. A more nuanced skin in the game rule that accounts for the specifics of the underlying security class can be more desirable rather than the proposed ”one size fits all” rule.

Suggested Citation

  • Ozerturk, Saltuk, 2017. "Moral hazard, skin in the game regulation and CRA performance," International Review of Economics & Finance, Elsevier, vol. 52(C), pages 147-164.
    • Handle: RePEc:eee:reveco:v:52:y:2017:i:c:p:147-164
    DOI: 10.1016/j.iref.2017.10.006
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    Cited by:

    1. Sahibzada, Irfan Ullah & Rizwan, Muhammad Suhail & Qureshi, Anum, 2022. "Impact of sovereign credit ratings on systemic risk and the moderating role of regulatory reforms: An international investigation," Journal of Banking & Finance, Elsevier, vol. 145(C).
    2. Krishnan, Kaveri & Mukherji, Arnab & Basu, Sankarshan, 2020. "Market responses to increased transparency: An Indian narrative," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 663-677.

    More about this item

    Keywords

    Credit rating agencies; Skin in the game; Rating accuracy; Moral hazard; Financial regulation;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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