Determinants and Consequences of Unexpected Bond Ratings: Evidence from Municipal Bond Rating Fees and Yield Premiums

56 Pages Posted: 14 Sep 2020 Last revised: 19 Aug 2021

See all articles by Amanda Beck

Amanda Beck

Georgia State University

Linda M. Parsons

University of Alabama - Culverhouse School of Accountancy

Trevor Sorensen

West Virginia University - Department of Accounting and Management Information Systems

Date Written: August 9, 2021

Abstract

Municipal bond investors consider bond ratings assigned by credit rating agencies (CRAs) when making investment decisions. Investors also evaluate other public information about the issuer, which may indicate a different level of creditworthiness than the rating suggests. We examine the information content of unexpected bond ratings using determinants (CRA fees) and consequences (yield premiums). Regarding determinants, we find a positive association between fees and the magnitude of unexpected ratings, especially when ratings are lower than expected (pessimistic) or when more work is required to rate the bond. We find no evidence that political incentives lead to higher-than-expected (optimistic) ratings. Regarding consequences, we find that investors respond asymmetrically to unexpected ratings. Specifically, the penalties for pessimistic ratings exceed the discounts for optimistic ratings. Our evidence suggests that unexpected ratings are informative to investors. Further, municipalities pay more, both to CRAs and as interest, when ratings are lower than expected.

Keywords: municipal bonds, bond ratings, credit rating agencies, credit rating fees

JEL Classification: G12, G24, G28, D82, H74, M40, M41

Suggested Citation

Beck, Amanda and Parsons, Linda M. and Sorensen, Trevor, Determinants and Consequences of Unexpected Bond Ratings: Evidence from Municipal Bond Rating Fees and Yield Premiums (August 9, 2021). Available at SSRN: https://ssrn.com/abstract=3664916 or http://dx.doi.org/10.2139/ssrn.3664916

Amanda Beck (Contact Author)

Georgia State University ( email )

P.O. Box 4050
Atlanta, GA 30302-4050
United States

Linda M. Parsons

University of Alabama - Culverhouse School of Accountancy ( email )

101 Paul W. Bryant Dr.
Box 870382
Tuscaloosa, AL 35487
United States

Trevor Sorensen

West Virginia University - Department of Accounting and Management Information Systems ( email )

Morgantown, WV 26506
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
60
Abstract Views
597
rank
437,642
PlumX Metrics