Estimating the Costs of Issuer-Paid Credit Ratings

Abstract:     
We compare the stability and timeliness of credit ratings produced by a traditional, issuer-paid rating agency (Moody’s Investors Service) and a subscriber-paid rater (Rapid Ratings). Moody’s ratings exhibit less volatility, but are slower to identify default risk. We control for Moody’s aversion to ratings volatility and still find its ratings are slower to update than Rapid Ratings. Accuracy ratios further indicate that Moody’s ratings are less accurate in an ordinal sense. We quantify the loss avoidance associated with Rapid Ratings’ more informative ratings in order to estimate costs associated with regulatory and contractual systems based on issuer-paid ratings.

Number of Pages in PDF File: 57

Keywords: Corporate Debt, Credit Ratings, NRSROs, Information Intermediary, Capital Markets Regulation

JEL Classification: G14, G28, G32

working papers series