Moody’s and S&P Ratings: Are They Equivalent? Conservative Ratings and Split Rated Bond Yields

Abstract

We examine the relative impact of Moody’s and S&P ratings on bond yields and find that at issuance, yields on split rated bonds with superior Moody’s ratings are about 8 basis points lower than yields on split rated bonds with superior S&P ratings. This suggests that investors differentiate between the two ratings and assign more weight to the ratings from Moody’s, the more conservative rating agency. Moody’s becomes more conservative after 1998 and the impact of a superior Moody’s rating becomes stronger. Furthermore, the differential impact of the two ratings is more pronounced for the more opaque Rule 144A issues.

Keywords: bond ratings, bond yields, reputation capital

JEL Classification: G12, G14, G21, G24, G28