Two-sided Certification: The Market for Rating Agencies

Rating agencies tend to offer certification services to both sides of the market: to firms and investors. Conflicts of interest might arise, since firms have an incentive to ”opti-mize ” their rating to attract favorably priced financing. We show in a theoretical model, that a credible rating agency will sell its services to both sides of the market to maxi-mize its own profits. Our model shows that observing firms paying the certifiers does not necessarily indicate impure certification results. Furthermore we identify markets in which two-sided certification compared to no certification and one-sided certification has a strong welfare increasing effect