Rating Through the Relationship: Soft Information and Credit Ratings
37 Pages Posted: 29 May 2003 Last revised: 24 Feb 2012
Date Written: February 22, 2012
The level of interaction between bond rating agencies and firms they rate varies substantially cross-sectionally. For instance, many bond ratings are solicited by bond issuers, resulting in a relationship between the firm and the rating agencies they hire. But other bond ratings are unsolicited, whereby there is generally no interchange of information between firm and agency, other than that which is already public. We examine the production of soft versus hard information by these non-bank intermediaries by studying the fees they charge firms they rate. We employ rating fees as a proxy for the effort exerted by credit analysts and find that when agencies charge higher fees, they rely less on publicly available hard information. We thus infer that these more costly ratings reflect an assessment of soft information about bond issuers. Our results are less consistent with fee variation due to extortion or rating shopping.
Keywords: Solicited bond rating, information production
JEL Classification: G14, G20, G24, G32, D80
Suggested Citation: Suggested Citation