Moody's and S&P Ratings: Are They Equivalent? Conservative Ratings and Split Rated Bond Yields

Abstract

We examine the relative impact of Moody’s and S&P ratings on bond yields and find that at issuance yields on split rated bonds with superior Moody’s ratings are, on average, 8 basis points lower than yields on split rated bonds with superior S&P ratings. This pattern suggests that investors differentiate between the two ratings and assign more weight to the ratings from Moody’s, the more conservative rating agency. Moody's ratings become relatively more conservative after 1998 and the impact of a superior Moody's rating upon split rated bond yields is stronger. In addition, the differential impact of the two ratings on split rated bond yields is more pronounced for Rule 144A issues, which are more opaque.