Rating Agency Fees: Pay to Play in Public Finance?
Review of Financial Studies, forthcoming
66 Pages Posted: 23 Apr 2019 Last revised: 21 Feb 2023
Date Written: August 12, 2022
Abstract
We examine the relationship between credit rating levels and rating agency fees in a public finance market where rating agencies earn lower fees and face higher disclosure requirements relative to corporate bond and structured finance markets. Controlling for variation in the complexity of credit analysis at the issue level, we find evidence that rating agency conflicts of interest distort credit ratings in the municipal bond market. Our results also suggest a substitution effect between certification agents in the muni market. The relationship between credit ratings and rating agency fees is driven by issuers who lose access to AAA insurance.
Keywords: Credit Ratings, Ratings Fees, Municipal Bonds, Bond Insurance, Information Production
JEL Classification: G24, G28
Suggested Citation: Suggested Citation