Does it matter who pays for bond ratings? Historical evidence

John Jiang (), Mary Harris Stanford and Yuan Xie

Journal of Financial Economics, 2012, vol. 105, issue 3, 607-621

Abstract: We test whether Standard and Poor's (S&P) assigns higher bond ratings after it switches from investor-pay to issuer-pay fees in 1974. Using Moody's rating for the same bond as a benchmark, we find that when S&P charges investors and Moody's charges issuers, S&P's ratings are lower than Moody's. Once S&P adopts issuer-pay, its ratings increase and no longer differ from Moody's. More importantly, S&P only assigns higher ratings for bonds that are subject to greater conflicts of interest, measured by higher expected rating fees or lower credit quality. These findings suggest that the issuer-pay model leads to higher ratings.

Keywords: Credit ratings; Investor pay; Issuer pay; Moody's; S&P (search for similar items in EconPapers)
JEL-codes: G18 G20 G28 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (96)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:105:y:2012:i:3:p:607-621

DOI: 10.1016/j.jfineco.2012.04.001

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