Does It Matter Who Pays for Bond Ratings? Historical Evidence

Abstract

We test whether Standard and Poor’s (S&P) assigns higher bond ratings after it switches from investor-pay to issuer-pay fees in 1974. Using Moody’s rating for the same bond as a benchmark, we find that when S&P charges investors and Moody’s charges issuers, S&P’s ratings are lower than Moody’s. Once S&P adopts issuer-pay, its ratings increase and no longer differ from Moody’s. More importantly, S&P only assigns higher ratings for bonds that are subject to greater conflicts of interest, measured by higher expected rating fees or lower credit quality. Our findings suggest that the issuer-pay model leads to higher ratings.

Keywords: Credit Ratings, Investor Pay, Issuer Pay, Moody’s, S&P

JEL Classification: G18, G20, G28