Did Going Public Impair Moody's Credit Ratings?

Posted: 26 May 2014

See all articles by Simi Kedia

Simi Kedia

Rutgers Business School

Shivaram Rajgopal

Columbia Business School

Xing (Alex) Zhou

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: May 25, 2014

Abstract

We investigate a prominent allegation in congressional hearings that Moody’s loosened its rating standards to chase revenue after it went public in 2000. Consistent with this allegation, Moody’s ratings for both corporate bonds and structured finance products are significantly more favorable to issuers, relative to S&P’s, after Moody’s IPO. Moreover, Moody’s ratings are more favorable for clients subject to greater conflict of interest. There is little evidence that Moody’s higher ratings, post-IPO, are more informative, measured as expected default frequencies (EDFs) or as the probability of default. Our findings inform the debate on whether financial gatekeepers should be publicly traded.

Keywords: Credit ratings; Initial public offering (IPO); Moody’s

JEL Classification: G32; L32

Suggested Citation

Kedia, Simi and Rajgopal, Shivaram and Zhou, Xing (Alex), Did Going Public Impair Moody's Credit Ratings? (May 25, 2014). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2441657

Simi Kedia

Rutgers Business School ( email )

117 Levin
94 Rockafellar Road
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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