Investor-Paid Ratings and Conflicts of Interest

Leo Tang, Marietta Peytcheva, Pei Li

Research output: Contribution to journalArticlepeer-review

5 Scopus citations


The Securities and Exchange Commission (SEC) sanctioned investor-paid rating agency Egan-Jones for falsely stating that it did not know its clients’ investment positions. The SEC’s action against Egan-Jones raises the broad question whether knowledge of clients’ investment positions creates a conflict of interest for investor-paid ratings. In an experimental setting, we find that investor-paid rating agencies are likely to assign credit ratings that are biased in favor of their clients’ positions, and that this effect is attenuated when the rated company has a sophisticated investor base that is expected to scrutinize ratings. The effect is not conditional on the risk profile of the rated companies. Taken together, our findings suggest that a conflict of interest stemming from investors’ preferences is likely to bias ratings under investor-pays business models, but scrutiny by the company’s investor base can counteract this bias.

Original languageEnglish (US)
Pages (from-to)365-378
Number of pages14
JournalJournal of Business Ethics
Issue number2
StatePublished - May 1 2020
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Business and International Management
  • General Business, Management and Accounting
  • Arts and Humanities (miscellaneous)
  • Economics and Econometrics
  • Law


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