Are Investor-paid Credit Ratings Superior?

67 Pages Posted: 13 Feb 2023 Last revised: 23 Apr 2024

See all articles by Nan Qin

Nan Qin

College of Business, Northern Illinois University

Lei Zhou

Northern Illinois University - Department of Finance

Date Written: April 26, 2023

Abstract

We compare investor-paid and issuer-paid corporate bond ratings in terms of rating standards, discriminatory power of default risk, stability/timeliness, and market impact. We find mixed results on rating standards and discriminatory power. While issuer-paid S&P ratings are more stringent and exhibit greater discriminatory power than the investor-paid Egan-Jones rating (EJR), issuer-paid Fitch ratings show the opposite trend. Furthermore, EJR updates its ratings more frequently, with fewer multiple-notch downgrades, but also exhibits a higher likelihood of rating reversals, suggesting that it caters more to investors’ demand for timely information updates. Lastly, issuer-paid rating changes generally trigger stronger market responses.

Keywords: Corporate bonds, credit ratings, rating standards, discriminatory power, rating stability, market impact

JEL Classification: G14, G20, G24, G28

Suggested Citation

Qin, Nan and Zhou, Lei, Are Investor-paid Credit Ratings Superior? (April 26, 2023). Available at SSRN: https://ssrn.com/abstract=4354204 or http://dx.doi.org/10.2139/ssrn.4354204

Nan Qin

College of Business, Northern Illinois University ( email )

740 Garden Road
236G
DEKALB, IL 60115
United States

Lei Zhou (Contact Author)

Northern Illinois University - Department of Finance ( email )

Wirtz Hall
DeKalb, IL 60115
United States
815-753-1115 (Phone)
815-753-0504 (Fax)

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