Estimating the Costs of Issuer-Paid Credit Ratings
Kimberly Rodgers Cornaggia
American University - Kogod School of Business
June 15, 2013
Review of Financial Studies 26(10) 2229-2269
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 lag Rapid Ratings’. More importantly, accuracy ratios indicate that Rapid Ratings provides a better ordinal ranking of credit risk. We quantify the loss avoidance associated with Rapid Ratings’ signals to estimate costs associated with regulatory and contractual systems based on issuer-paid ratings.
Number of Pages in PDF File: 61
Keywords: Corporate Debt, Credit Ratings, NRSROs, Information Intermediary, Capital Markets Regulation
JEL Classification: G14, G24, G28, G32Accepted Paper Series
Date posted: November 9, 2010 ; Last revised: March 18, 2014
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