Are investor‐paid credit ratings superior?

Nan Qin and Lei Zhou

Financial Management, 2025, vol. 54, issue 1, 53-87

Abstract: We conduct pairwise comparisons of corporate bond ratings between three issuer‐paid credit rating agencies (CRAs) and one investor‐paid CRA regarding rating standard, accuracy, stability, and market impact. We find that neither compensation model results in more stringent or accurate ratings. While issuer‐paid S&P ratings are more stringent and accurate than investor‐paid Egan‐Jones ratings (EJR), issuer‐paid Fitch ratings are less stringent and have similar or lower accuracy compared to EJR ratings. In contrast, investor‐ and issuer‐paid ratings exhibit different rating change behaviors. EJR updates its ratings more frequently with fewer multinotch downgrades but also has a higher likelihood of rating reversals, while rating change behaviors are similar among the three issuer‐paid CRAs. Finally, issuer‐paid rating changes trigger stronger market responses.

Date: 2025
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