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Did going public impair Moody׳s credit ratings?

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  • Kedia, Simi
  • Rajgopal, Shivaram
  • Zhou, Xing

Abstract

We investigate a prominent allegation in congressional hearings that Moody׳s loosened its rating standards to chase revenue after it went public in 2000. Consistent with this allegation, Moody׳s ratings for both corporate bonds and structured finance products are significantly more favorable to issuers, relative to S&P׳s, after Moody׳s IPO. Moreover, Moody׳s ratings are more favorable for clients subject to greater conflict of interest. There is little evidence that Moody׳s higher ratings, post-IPO, are more informative, measured as expected default frequencies (EDFs) or as the probability of default. Our findings inform the debate on whether financial gatekeepers should be publicly traded.

Suggested Citation

  • Kedia, Simi & Rajgopal, Shivaram & Zhou, Xing, 2014. "Did going public impair Moody׳s credit ratings?," Journal of Financial Economics, Elsevier, vol. 114(2), pages 293-315.
    • Handle: RePEc:eee:jfinec:v:114:y:2014:i:2:p:293-315
    DOI: 10.1016/j.jfineco.2014.07.005
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    More about this item

    Keywords

    Credit ratings; Initial public offering (IPO); Moody׳s;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L32 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Enterprises; Public-Private Enterprises

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