Do Bond Issuers Shop for Favorable Credit Ratings?
University of Illinois at Urbana-Champaign
January 16, 2016
I provide evidence of ratings shopping among corporate bonds. Firms are more likely to publish ratings from an agency that rates their bonds relatively favorably, and firms are also more likely to delay publication of any unfavorable ratings. This bias is strongest among junior and long-term bonds that are more complex to rate, and in times when the Baa--Aaa spread is high. I also show that firms strategically manage the number of ratings near a regulation-based threshold. Bonds with a shopping-biased rating are more likely to default, but investors account for this bias and demand higher yields for these bonds.
Number of Pages in PDF File: 65
Keywords: Ratings shopping, credit rating agencies, corporate bonds, regulation
JEL Classification: G10, G14, G18, G20, G28, G30, G38
Date posted: November 22, 2010 ; Last revised: January 30, 2016