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Does it matter who pays for bond ratings? Historical evidence

Author

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  • Jiang, John (Xuefeng)
  • Harris Stanford, Mary
  • Xie, Yuan

Abstract

We test whether Standard and Poor's (S&P) assigns higher bond ratings after it switches from investor-pay to issuer-pay fees in 1974. Using Moody's rating for the same bond as a benchmark, we find that when S&P charges investors and Moody's charges issuers, S&P's ratings are lower than Moody's. Once S&P adopts issuer-pay, its ratings increase and no longer differ from Moody's. More importantly, S&P only assigns higher ratings for bonds that are subject to greater conflicts of interest, measured by higher expected rating fees or lower credit quality. These findings suggest that the issuer-pay model leads to higher ratings.

Suggested Citation

  • Jiang, John (Xuefeng) & Harris Stanford, Mary & Xie, Yuan, 2012. "Does it matter who pays for bond ratings? Historical evidence," Journal of Financial Economics, Elsevier, vol. 105(3), pages 607-621.
    • Handle: RePEc:eee:jfinec:v:105:y:2012:i:3:p:607-621
    DOI: 10.1016/j.jfineco.2012.04.001
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    References listed on IDEAS

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    More about this item

    Keywords

    Credit ratings; Investor pay; Issuer pay; Moody's; S&P;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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