Credit ratings and top management incentives

Mounting criticism has been raised on the prominent role and intrinsic value of credit ratings by rating agencies, and their competence in assessing firms’ default risk. This study examines the relations between credit ratings, top management incentives and corporate risk-taking. It appears that rating agencies do incorporate these incentives into their assessment of default risk – and that companies indeed do decrease such incentives, when they negatively influence ratings. This, contrary to popular belief, corroborates the role of credit rating agencies in today’s capital markets.

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