Rating Shopping and Rating Inflation in Israel
41 Pages Posted: 2 Aug 2011 Last revised: 13 Mar 2014
Date Written: February 15, 2014
Firms may exploit the option of choosing among different rating agencies in order to pick the highest rating offered. This possibility, known as rating shopping, is relatively limited on the US corporate bond market because the two main rating agencies (S&P and Moody’s) rate virtually all large bond issuers. In this study, we use data on corporate bond ratings assigned by two Israeli rating agencies affiliated with S&P and Moody’s during the period 2004-2012. We show that while one agency (Midroog) systematically assigned higher ratings, the ratings of the other agency (S&P-Maalot) were inflated due to rating shopping. However, despite the many features that encourage rating inflation, the resulting distortion was relatively small (one notch). This may be a fair price for maintaining a competitive rating industry.
Keywords: Corporate bonds; Credit ratings; Rating agencies; Rating shopping; Rating inflation
JEL Classification: G01, G24, G28, G33
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