Does Ratings Shopping Distort Observed Bond Ratings?

Abstract:     
This paper provides empirical evidence of ratings shopping among corporate bonds. I show that firms are more likely to obtain ratings for new issues from an agency that rated the firm favorably in the past. Ratings shopping is more prevalent for bonds that are more complex to rate, and during times when the Baa--Aaa spread is high. I also find that firms manage the number of ratings near a regulation-based threshold. Moreover, bonds with a shopped rating are more likely to default, but investors account for this bias and ask for higher yields for these bonds.

Number of Pages in PDF File: 59

Keywords: Ratings shopping, credit rating agencies, corporate bonds, regulation

JEL Classification: G10, G14, G18, G20, G28, G30, G38

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