Do Rating Agencies Benefit From Providing Higher Ratings? Evidence From the Consequences of Municipal Bond Ratings Recalibration

Abstract

We ask whether credit rating agencies receive higher fees and gain greater market share when they provide more favorable ratings. To investigate this question we use the 2010 rating scale recalibration by Moody’s and Fitch, which increased ratings absent any underlying change in issuer credit quality. Consistent with prior research, we find that the recalibration allowed the clients of Moody’s and Fitch to receive better ratings and lower yields. We add to this evidence by showing that the recalibration also led to larger fees and to increases in the market share of Moody’s and Fitch. These results are consistent with critics’ concerns about the effects of the issuer-pay model on the credit ratings market.

Keywords: Rating agencies, Municipal bonds, Conflicts of interest

JEL Classification: G24, G28, H74, M40, M41