Credit Rating Agency Fees: Pay to Play or Pay for Work?

61 Pages Posted: 23 Apr 2019

See all articles by Jess Cornaggia

Jess Cornaggia

Pennsylvania State University - Department of Finance

Kimberly Rodgers Cornaggia

Pennsylvania State University - Department of Finance

Ryan D. Israelsen

Michigan State University - Department of Finance

Date Written: March 8, 2019

Abstract

We document a significant relationship between ratings fees and credit rating levels in the municipal bond market. In contrast to prior evidence from the corporate bond and structured finance markets indicating a “pay to play” phenomenon, our results suggest that ratings fees in the municipal market are pay for work. We conclude that rating agency incentives differ across asset classes and that fee disclosure mitigates the conflict of interest inherent in an issuer-pays compensation structure. Our results also suggest a substitution effect between certification agents in the muni market. The strong positive relationship between fees and ratings is exclusive to the subset of now uninsured issuers who previously purchased AAA ratings from MBIA and AMBAC. Without the benefit of the AAA pricing provided by AAA insurers, these issuers have increased incentive to pay rating agencies for certification.

Keywords: Credit Ratings, Ratings Fees, Municipal Bonds, Bond Insurance, Information Production

JEL Classification: G24, G28

Suggested Citation

Cornaggia, Jess and Cornaggia, Kimberly Rodgers and Israelsen, Ryan D., Credit Rating Agency Fees: Pay to Play or Pay for Work? (March 8, 2019). Available at SSRN: https://ssrn.com/abstract=3350586 or http://dx.doi.org/10.2139/ssrn.3350586

Jess Cornaggia

Pennsylvania State University - Department of Finance ( email )

University Park, PA 16802
United States

HOME PAGE: http://jesscornaggia.com

Kimberly Rodgers Cornaggia (Contact Author)

Pennsylvania State University - Department of Finance ( email )

306 Business Bldg
University Park, PA 16802
United States
814-865-2243 (Phone)
814-865-3362 (Fax)

HOME PAGE: http://directory.smeal.psu.edu/kjr15

Ryan D. Israelsen

Michigan State University - Department of Finance ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States

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