Large Shareholders and Credit Ratings

59 Pages Posted: 28 May 2016  

Simi Kedia

Rutgers Business School

Shivaram Rajgopal

Columbia Business School

Xing (Alex) Zhou

Board of Governors of the Federal Reserve System

Date Written: May 27, 2016

Abstract

This paper addresses regulatory concerns that large shareholders of credit rating agencies may influence the rating process. Unlike S&P which is a privately held division of McGraw Hill, Moody’s is a public company listed on the NYSE. Over the period 2001 to 2010, Moody’s had two shareholders, Berkshire Hathaway and Davis Selected Advisors, who collectively own about 23.5% of Moody’s. Moody’s ratings on bonds issued by important investee firms of these two stable large shareholders were more favorable relative to S&P’s, as well as Fitch, ratings. We exploit Moody’s IPO in 2000 to address endogeneity and to mitigate concerns that the results are driven by issuer characteristics or by the greater informativeness of Moody’s ratings. S&P’s parent, McGraw Hill, has a large shareholder for much less time, and there is some weak evidence that S&P ratings are relatively more favorable towards the owners of its parent. These findings are consistent with regulatory concerns about the ownership and governance of rating agencies, especially those that are publicly listed.

Keywords: Moody's; S&P; credit rating agencies; ownership structure; conflict of interest; difference-in-difference; corporate bond; CMBS

JEL Classification: G32; L32

Suggested Citation

Kedia, Simi and Rajgopal, Shivaram and Zhou, Xing (Alex), Large Shareholders and Credit Ratings (May 27, 2016). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2785711

Simi Kedia

Rutgers Business School ( email )

117 Levin
94 Rockafellar Road
Piscataway, NJ
United States
8484454195 (Phone)

Shivaram Rajgopal

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Xing (Alex) Zhou (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

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