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

See all articles by Jess Cornaggia

Jess Cornaggia

Pennsylvania State University - Department of Finance

Kimberly Cornaggia

Pennsylvania State University - Department of Finance

Ryan D. Israelsen

Michigan State University - Department of Finance

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

Cornaggia, Jess and Cornaggia, Kimberly and Israelsen, Ryan D., Rating Agency Fees: Pay to Play in Public Finance? (August 12, 2022). Review of Financial Studies, forthcoming, Available at SSRN: https://ssrn.com/abstract=3350586 or http://dx.doi.org/10.2139/ssrn.3350586

Jess Cornaggia

Pennsylvania State University - Department of Finance ( email )

University Park, PA 16802
United States

HOME PAGE: http://https://directory.smeal.psu.edu/jnc29

Kimberly Cornaggia (Contact Author)

Pennsylvania State University - Department of Finance ( email )

306 Business Bldg
University Park, PA 16802
United States
814-865-2243 (Phone)
814-865-3362 (Fax)

HOME PAGE: http://directory.smeal.psu.edu/kjr15

Ryan D. Israelsen

Michigan State University - Department of Finance ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States

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