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

45 Pages Posted: 16 Nov 2017 Last revised: 19 Apr 2019

See all articles by Anne Beatty

Anne Beatty

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Jacquelyn Gillette

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Reining Petacchi

Georgetown University - Department of Accounting and Business Law

Joseph Weber

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: March 6, 2019

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

Suggested Citation

Beatty, Anne L. and Gillette, Jacquelyn and Petacchi, Reining and Weber, Joseph Peter, Do Rating Agencies Benefit From Providing Higher Ratings? Evidence From the Consequences of Municipal Bond Ratings Recalibration (March 6, 2019). Georgetown McDonough School of Business Research Paper No. 3070712. Available at SSRN: https://ssrn.com/abstract=3070712 or http://dx.doi.org/10.2139/ssrn.3070712

Anne L. Beatty

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

Jacquelyn Gillette (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Ave. E62-663
Cambridge, MA 02142
United States

Reining Petacchi

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States

Joseph Peter Weber

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States
617-253-4310 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
287
Abstract Views
1,638
rank
106,537
PlumX Metrics