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Estimating the Costs of Issuer-Paid Credit Ratings

Review of Financial Studies 26(10) 2229-2269

61 Pages Posted: 9 Nov 2010 Last revised: 18 Mar 2014

Jess Cornaggia

Pennsylvania State University - Department of Finance

Kimberly Rodgers Cornaggia

Pennsylvania State University - Department of Finance

Date Written: June 15, 2013

Abstract

We compare the stability and timeliness of credit ratings produced by a traditional issuer-paid rating agency (Moody’s Investors Service) and a subscriber-paid rater (Rapid Ratings). Moody’s ratings exhibit less volatility but are slower to identify default risk. We control for Moody’s aversion to ratings volatility and still find its ratings lag Rapid Ratings’. More importantly, accuracy ratios indicate that Rapid Ratings provides a better ordinal ranking of credit risk. We quantify the loss avoidance associated with Rapid Ratings’ signals to estimate costs associated with regulatory and contractual systems based on issuer-paid ratings.

Keywords: Corporate Debt, Credit Ratings, NRSROs, Information Intermediary, Capital Markets Regulation

JEL Classification: G14, G24, G28, G32

Suggested Citation

Cornaggia, Jess and Cornaggia, Kimberly Rodgers, Estimating the Costs of Issuer-Paid Credit Ratings (June 15, 2013). Review of Financial Studies 26(10) 2229-2269. Available at SSRN: https://ssrn.com/abstract=1705843 or http://dx.doi.org/10.2139/ssrn.1705843

Jess Cornaggia

Pennsylvania State University - Department of Finance ( email )

University Park, PA 16802
United States

HOME PAGE: http://jesscornaggia.com

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)

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