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Research Seminar - Professor Paolo Fulghieri

When May 14, 2012
from 02:00 PM to 03:30 PM
Where W4.05, CJBS
Contact Name
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'The Economics of Solicited and Unsolicited Credit Ratings'

Professor Paolo Fulghieri, Kenan-Flagler Business School, University of North Carolina


This paper develops a dynamic rational expectations model of the credit rating process, incorporating three critical elements of this industry: (i) the rating agencies' ability to misreport the issuer's credit quality, (ii) their ability to issue unsolicited ratings, and (iii) their reputational concerns. We analyze the incentives of credit rating agencies to issue unsolicited credit ratings and the effects of this practice on the agencies' rating strategies. We find that the issuance of unfavorable unsolicited credit ratings enables rating agencies to extract higher fees from issuers by credibly threatening to punish those that refuse to solicit a rating. Also, issuing unfavorable unsolicited ratings increases the rating agencies' reputation by demonstrating to investors that they resist the temptation to issue inflated ratings. In equilibrium, unsolicited credit ratings are lower than solicited ratings, because all favorable ratings are solicited; however, they do not have a downward bias. We show that, under certain conditions, a credit rating system that incorporates unsolicited ratings leads to more stringent rating standards. Finally, we argue that credit rating standards vary over the business cycle in a countercyclical fashion where economic\booms" are associated with lower standards and are followed by an increase in default rates of highly rated securities.


Professor Paolo Fulghieri's research interests are in corporate finance, entrepreneurial finance and financial intermediation, with a special focus on venture capital and initial public offerings.  His areas of expertise include bank/banking, capital structure, corporate finance, corporate governance, economics of information, entrepreneurship, finance, investment banking, IPOs  (initial public offerings), valuation, and venture capital.

As part of his research activity, he has published extensively in leading finance journals such as the Journal of Finance, Journal of Financial Economics and Review of Financial Studies. He also is the winner of a best paper award in the Journal of Banking and Finance. He was formerly Editor of The Review of Financial Studies, and he is currently the Executive Editor of The Review of Corporate Finance Studies.

Dr. Fulghieri has taught extensively corporate finance in the MBA and Executive Education programs at Columbia University, Northwestern University, University of Chicago, University of North Carolina, and INSEAD, where he was also dean of its PhD program.

He received his PhD and MA in economics from the University of Pennsylvania, and his Laurea in Economics from Universita' Commerciale L. Bocconi in Milan.

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