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Advertisement-financed credit ratings

Author

Listed:
  • Heidrun Hoppe-Wewetzer

    (Leibniz University)

  • Christian Siemering

    (Leibniz University)

Abstract

This paper investigates the incentives of a credit rating agency (CRA) to generate accurate ratings under an advertisement-based business model. To this end, we study a two-period endogenous reputation model in which a CRA can increase the precision of its ratings by exerting effort. The CRA receives a revenue not from rating fees, as is standard in the literature, but through online advertising. We show that the advertisement-based business model provides sufficient incentives for the CRA to improve the precision of signals at intermediate levels of reputation. Furthermore, we identify conditions under which truthful reporting is incentive compatible.

Suggested Citation

  • Heidrun Hoppe-Wewetzer & Christian Siemering, 2022. "Advertisement-financed credit ratings," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 46(1), pages 188-206, January.
    • Handle: RePEc:spr:jecfin:v:46:y:2022:i:1:d:10.1007_s12197-021-09562-8
    DOI: 10.1007/s12197-021-09562-8
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    References listed on IDEAS

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    More about this item

    Keywords

    Credit rating agencies; Rating precision; Information acquisition; Advertisement; Reputation;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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