45 Pages Posted: 29 Oct 2011 Last revised: 12 Mar 2012
Date Written: Nov 3, 2011
We test whether Standard and Poor’s (S&P) assigns higher bond ratings after it switches from investor-pay to issuer-pay fees in 1974. Using Moody’s rating for the same bond as a benchmark, we find that when S&P charges investors and Moody’s charges issuers, S&P’s ratings are lower than Moody’s. Once S&P adopts issuer-pay, its ratings increase and no longer differ from Moody’s. More importantly, S&P only assigns higher ratings for bonds that are subject to greater conflicts of interest, measured by higher expected rating fees or lower credit quality. These findings suggest that the issuer-pay model leads to higher ratings.
Keywords: Credit Ratings, Investor Pay, Issuer Pay, Moody’s, S&P
JEL Classification: G18, G20, G28
Suggested Citation: Suggested Citation
Jiang, John (Xuefeng) and Stanford, Mary Harris and Xie, Yuan, Does it Matter Who Pays for Bond Ratings? Historical Evidence (Nov 3, 2011). Journal of Financial Economics (JFE), Forthcoming; Fordham University School of Business Research Paper No. 1950748. Available at SSRN: https://ssrn.com/abstract=1950748