Does It Matter Who Pays for Bond Ratings? Historical Evidence
John (Xuefeng) Jiang
Michigan State University
Mary Harris Stanford
Texas Christian University - Department of Accounting
December 20, 2010
Journal of Financial Economics (JFE), Forthcoming
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. Our findings suggest that the issuer-pay model leads to higher ratings.
Number of Pages in PDF File: 41
Keywords: Credit Ratings, Investor Pay, Issuer Pay, Moody’s, S&P
JEL Classification: G18, G20, G28Accepted Paper Series
Date posted: September 28, 2010 ; Last revised: November 3, 2011
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