Do Bond Issuers Shop for Favorable Credit Ratings?
University of Illinois at Urbana-Champaign
November 16, 2014
I provide evidence of ratings shopping among corporate bonds. Firms are more likely to publish ratings from an agency that is expected to rate their bonds relatively favorably. This bias is strongest among bonds that are complex to rate, and in times when the Baa-Aaa spread is high. Furthermore, firms often delay the publication of unfavorable ratings, and strategically manage the number of ratings near a regulation-based threshold. Bonds with a shopped rating are more likely to default, but investors account for this bias and demand higher yields for these bonds.
Number of Pages in PDF File: 64
Keywords: Ratings shopping, credit rating agencies, corporate bonds, regulation
JEL Classification: G10, G14, G18, G20, G28, G30, G38
Date posted: November 22, 2010 ; Last revised: November 20, 2014
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