Did Going Public Impair Moody's Credit Ratings?

61 Pages Posted: 25 Oct 2013  

Simi Kedia

Rutgers Business School

Shivaram Rajgopal

Columbia Business School

Xing (Alex) Zhou

Board of Governors of the Federal Reserve System

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Date Written: October 22, 2013

Abstract

We investigate a prominent allegation in Congressional hearings that Moody’s loosened its standards for assigning credit ratings after it went public in the year 2000 in an attempt to chase market share and increase revenue. We exploit a difference-in-difference design by benchmarking Moody’s ratings with those assigned by its rival S&P before and after 2000. Consistent with Congressional allegations, we find that Moody’s credit ratings for new and outstanding corporate bonds are significantly more favorable to issuers relative to S&P’s after Moody’s initial public offering (IPO) in 2000. The higher ratings assigned by Moody’s after its IPO are more pronounced for clients that are large issuers of structured finance products and operate in the financial industry, consistent with testimonies that easier rating standards originated in the structured finance products group of Moody’s. Moody’s ratings are also more favorable for clients where Moody’s is likely to face larger conflicts of interest: (i) large issuers; (ii) firms that are more likely to benefit from higher ratings, on the margin; and (iii) in industries with greater competition from Fitch. Moody’s higher ratings, post IPO, are also less informative when accuracy is measured as expected default frequencies (EDFs) or as the likelihood of bond defaults. Our findings have implications for incentives created by a public offering for capital market gatekeepers and professional firms.

Suggested Citation

Kedia, Simi and Rajgopal, Shivaram and Zhou, Xing (Alex), Did Going Public Impair Moody's Credit Ratings? (October 22, 2013). Available at SSRN: https://ssrn.com/abstract=2343783 or http://dx.doi.org/10.2139/ssrn.2343783

Simi Kedia

Rutgers Business School ( email )

117 Levin
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Piscataway, NJ
United States
8484454195 (Phone)

Shivaram Rajgopal (Contact Author)

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Xing (Alex) Zhou

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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