Does Observability of Ratings Shopping Improve Ratings Quality?
By Sanjay Kallapur, Abdul Khizer, Hariom Manchiraju, Rajesh Vijayraghavan
Citation
Kallapur, Sanjay., Khizer, Abdul., Manchiraju, Hariom., Vijayraghavan, Rajesh. (2025). Does Observability of Ratings Shopping Improve Ratings Quality? .
Copyright
2025
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Abstract
It has been argued that the inherent conflict of interest from the issuer-pay model in the credit rating agencies (CRA) leads to rating shopping behavior, and ratings inflation. But the extent of rating shopping by debt issuers, and the CRAs ability to cater is unobservable and therefore difficult to empirically examine. In this paper, we exploit a unique setting in India that enhanced disclosure requirements for CRAs to disclose rating shopping from issuer; and ask whether these increased disclosures have an effect on ratings shopping and ratings inflation. We find that the disclosure requirements result in a decline in explicit rating shopping. We also find that in the post-regulation period, issuers are more likely to approach a smaller CRA, and this bargaining leads to an unintended increase in implicit rating shopping. We document an increase in the incidence of an issuing instrument receiving an investment grade, with the results being stronger to the subsample of larger issuing firms, and smaller CRAs suggesting that the potential for future business induces CRA to issue favorable ratings to larger issuers. These results are consistent with the view that the enhanced disclosure requirements had an unintended effect, and that it did not achieve its objective in reducing shopping.

Sanjay Kallapur is a Professor of Accounting at the Indian School of Business (ISB). He joined ISB in 2005 from the Krannert School of Management, Purdue University, where he was a tenured Associate Professor.

Professor Kallapur conducts research on financial and managerial accounting, auditing, corporate governance, and risk management. He has published in each of the top three accounting journals, and his papers have been cited over 4,000 times (Google Scholar) and in regulatory policy documents in India and the UK. The American Accounting Association recently published his monograph on scientific inference in accounting research, beyond the use of p-values.

He is the founding Editor-in-Chief of Accounting Theory and Practice, a research journal focusing on India, published by Elsevier. He has been an editor of The Accounting Review from 2008 to 2011, the first person from outside North America to be appointed to that position.

Professor Kallapur is a member of National Financial Reporting Authority (NFRA), the regulatory body overseeing the accounting and auditing of listed companies in India. He is an independent director on the Board of IDBI Bank, where he serves on the risk management and audit committees. He previously served on the Board of the Life Insurance Corporation of India.

Professor Kallapur has held positions as Associate Dean and Deputy Dean for almost a decade at ISB. He started the PhD-equivalent Fellow Programme in Management at ISB and has placed his students in faculty positions at the London School of Economics, IESEG Paris, Aalto University, University of Queensland, University of Western Australia, and IIM Udaipur.

Professor Kallapur has a PhD in Business Economics from Harvard Business School, and B.Com. and M.M.S. degrees from Mumbai University. He is professionally qualified as a Fellow Member of the Institute of Cost Accountants of India (FCMA).

Sanjay Kallapur
Sanjay Kallapur

Hariom Manchiraju is an Associate Professor of Accounting at the Indian School of Business (ISB). He holds a PhD and an MBA from the State University of New York – Buffalo, a Master of Financial Management (MFM) from Sri Satya Sai University, India, and Bachelor’s degree in Commerce from Osmania University, India.

His research focuses on the usefulness of accounting information in capital markets, the characteristics and value of financial forecasts issued by managers and analysts, and topics related to executive compensation and corporate governance.

His teaching interests lie in financial accounting, particularly financial statement analysis for MBA students and advanced financial accounting for senior undergraduates. He is a member of the American Accounting Association.

Prof Hariom Manchiraju
Hariom Manchiraju