Split Ratings, Bond Yields, and Underwriter Spreads for Industrial Bonds

Abstract

A split bond rating occurs when Moody's and Standard & Poors give different ratings to the same issue. We examine 1,277 public industrial bond issues, where 221 have split ratings, issued from 1980 through mid-1993. For split-rated industrial bonds, neither rating agency consistently gives higher ratings. Earlier studies find yields for split-rated bonds to be priced as either the higher or the lower of the ratings. We find the yields on split-rated bonds to be an average of the yields on the two ratings. Split ratings for industrial bonds appear to reflect random differences on the part of rating agencies. Our results differ from previous studies because we use a substantially larger sample and include high-yield bonds. As long as a bond has an investment-grade rating, the underwriter fees are found to be essentially the same for all categories. Below investment-grade, the rating substantially affects the underwriter fee. Thus split ratings for high-yield bonds have an important effect upon the underwriter spread paid.

JEL Classification: G12, G14