Review of Financial Studies 26(10) 2229-2269
61 Pages Posted: 9 Nov 2010 Last revised: 18 Mar 2014
Date Written: June 15, 2013
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: 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