Do Bond Issuers Shop for Favorable Credit Ratings?
63 Pages Posted: 22 Nov 2010 Last revised: 11 Mar 2019
Date Written: February 28, 2019
This paper provides evidence of ratings shopping in the corporate bond market. By exploiting systematic differences in bias across agencies about any given firm's bonds, I show that bonds are more likely to be rated by agencies with a positive bias---a pattern most notable 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 patterns are strongest among bonds that are complex to rate. Bonds with upward-biased ratings are more likely to be subsequently downgraded and default, but investors account for this bias and demand higher yields for these bonds.
Keywords: Ratings shopping, credit rating agencies, corporate bonds, regulation
JEL Classification: G10, G14, G18, G20, G28, G30, G35, G38
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