Do Bond Issuers Shop for Favorable Credit Ratings?
Management Science, Forthcoming
64 Pages Posted: 22 Nov 2010 Last revised: 9 Jul 2019
Date Written: June 28, 2019
This paper provides evidence of ratings shopping in the corporate bond market. By estimating systematic differences in agencies' biases about any given firm's bonds, I show that new bonds are more likely to be rated by agencies that are positively biased towards the firm---a pattern that is strongest among bonds that have only one rating. The paper also shows that issuers often delay less favorable ratings until after a bond is sold. Consistent with theoretical models of ratings shopping, these effects are strongest among more complex bonds that are more difficult to rate. Bonds with upward-biased ratings are more likely to be downgraded and default, but investors account for this bias and demand higher yields when buying these bonds.
Keywords: Ratings shopping, credit rating agencies, corporate bonds, regulation
JEL Classification: G10, G14, G18, G20, G24, G28, G30, G35, G38
Suggested Citation: Suggested Citation