The impact of issuer-pay on corporate bond rating properties: Evidence from Moody׳s and S&P׳s initial adoptions

Samuel B. Bonsall

Journal of Accounting and Economics, 2014, vol. 57, issue 2, 89-109

Abstract: This study examines whether and how the properties of corporate bond ratings change following Moody׳s and S&P׳s adoptions of the issuer-pay business model in the early 1970s. Regulators and debt market observers have criticized the issuer-pay model for creating an independence problem. However, the issuer-pay model allows for economic bonding between rating agencies and issuers through explicit contractual arrangements, which should improve the flow of nonpublic information. Using a difference-in-difference research design, I find that more optimistic ratings by issuer-pay rating agencies predict greater future profitability, differences between the ratings of issuer-pay and investor-pay rating agencies are associated with narrower secondary bond market bid-ask spreads, and that issuer-pay rating agencies become relatively more accurate and timely predictors of default compared to investor-pay agencies after the adoption of issuer-pay. These results reinterpret the recent findings of optimistic ratings by Jiang et al. (2012) as consistent with more informative bond ratings.

Keywords: Bond rating agencies; Issuer-pay model; Conflicts of interest; Rating quality; Accuracy; Timeliness (search for similar items in EconPapers)
JEL-codes: D82 D83 G24 G28 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:57:y:2014:i:2:p:89-109

DOI: 10.1016/j.jacceco.2014.01.001

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