Course: RSM432: Risk Management for Financial Managers

For this group research project, we analyzed the structural frictions and regulatory challenges within the credit rating agency (CRA) ecosystem. From the issuer-pay model and conflict of interest, to market concentration and regulatory overreach, we broke down how CRAs shape — and sometimes distort — financial markets. We drew from real-world crises (e.g., 2008) and empirical literature to examine how incentives, competition, and analyst behaviour interact in this tightly controlled space. Beyond just diagnosing problems, we explored potential solutions (e.g. randomized CRA assignment and an investor-pay model) and evaluated their trade-offs. It was eye-opening to see how reputational forces alone aren’t enough to keep rating inflation in check when structural incentives are misaligned.

Key Concepts:

• Issuer-pay model and inherent conflicts of interest

• Market concentration among “Big Three” CRAs

• Rating inflation and issuer shopping

• Regulatory responses: Dodd-Frank, IOSCO, EU CRA rules

• Empirical analysis of competition’s impact on rating quality

• Analyst-level incentives (promotion vs. pessimism bias)

• Reform ideas: investor-pay model, CRA liability, professional certifications

• Case study synthesis of policy trade-offs and unintended consequences