57 Pages Posted: 22 Nov 2010 Last revised: 10 Apr 2017
Date Written: March 19, 2017
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. This pattern is especially strong 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, both patterns are strongest among bonds that are complex to rate. Further, by exploiting a unique regulation-driven threshold that specifically encourages publishing only one rating, I show that issuers strategically manage their ratings around this threshold. Bonds with upward-biased ratings are more likely to default, but investors seem to 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, G38
Suggested Citation: Suggested Citation
By Lin Cong