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Estimating the Costs of Issuer-Paid Credit Ratings

Jess Cornaggia

Georgetown University

Kimberly Rodgers Cornaggia

Pennsylvania State University - Department of Finance

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, G32

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Date posted: November 9, 2010 ; Last revised: March 18, 2014

Suggested Citation

Cornaggia, Jess and Cornaggia, Kimberly Rodgers, Estimating the Costs of Issuer-Paid Credit Ratings (June 15, 2013). Review of Financial Studies 26(10) 2229-2269. Available at SSRN: http://ssrn.com/abstract=1705843 or http://dx.doi.org/10.2139/ssrn.1705843

Contact Information

Jess Cornaggia
Georgetown University ( email )
3700 O Street, NW
Washington, DC 20057
United States
HOME PAGE: http://www.jesscornaggia.com
Kimberly Rodgers Cornaggia (Contact Author)
Pennsylvania State University - Department of Finance ( email )
352 Business Bldg
University Park, PA 16802
United States
814-863-0486 (Phone)
814-865-3362 (Fax)
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