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Does It Matter Who Pays for Bond Ratings? Historical Evidence
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In this paper, the authors test whether Standard and Poor's assigns higher bond ratings after it switched from investor-pay to issuer-pay fees in 1974, and they find that when S&P charges investors and Moody's charges issuers, ratings are lower than Moody's.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. Our findings suggest that the issuer-pay model leads to higher ratings.read more
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Markets: The Credit Rating Agencies
TL;DR: In this article, the authors explore how the financial regulatory structure propelled three credit rating agencies (Moody's, Standard & Poor's (S&P), and Fitch) to the center of the U.S. bond markets, and how these ingredients combined to contribute to the subprime mortgage debacle and associated financial crisis.
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Gender Differences in Financial Reporting Decision-Making: Evidence from Accounting Conservatism
TL;DR: In this article, the effect of CFO gender on corporate financial reporting decision-making was investigated and it was found that female CFOs are more conservative in their financial reporting.
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Have Rating Agencies Become More Conservative? Implications for Capital Structure and Debt Pricing
TL;DR: This paper found that firms affected more by conservatism issue less debt, have lower leverage, hold more cash, are less likely to obtain a debt rating, and experience lower growth than unaffected firms with the same rating.
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Have Rating Agencies Become More Conservative? Implications for Capital Structure and Debt Pricing
TL;DR: This article showed that rating agencies have become more conservative in assigning credit ratings to corporations over the period 1985 to 2009, which has also affected capital structure, cash holdings, growth, and debt spreads.
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Can Investor-Paid Credit Rating Agencies Improve the Information Quality of Issuer-Paid Rating Agencies?
TL;DR: In this paper, the authors examined how the information quality of ratings from an issuer-paid rating agency (Standard and Poor's) responds to the entry of an investor paid rating agency, the Egan-Jones Rating Company (EJR), by comparing S&P ratings quality before and after EJR initiates coverage of each firm.
References
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Journal Article
Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure
TL;DR: In this paper, the authors integrate elements from the theory of agency, property rights and finance to develop a theory of the ownership structure of the firm and define the concept of agency costs, show its relationship to the separation and control issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears costs and why and investigate the Pareto optimality of their existence.
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Equity Volatility and Corporate Bond Yields
TL;DR: This paper explored the effect of equity volatility on corporate bond yields and found that idiosyncratic firm-level volatility can explain as much cross-sectional variation in yields as can credit ratings, together with the upward trend in idiosyncratic equity volatility documented by Campbell, Lettau, Malkiel, and Xu.
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Rating Banks: Risk and Uncertainty in an Opaque Industry
TL;DR: This paper found that bond raters are inherently more opaque than other firms, and that they split more frequently over these financial intermediaries, and the splits are more lopsided, as theory here predicts.
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The Declining Credit Quality of U.S. Corporate Debt: Myth or Reality?
TL;DR: In this article, an ordered probit analysis of a panel of firms from 1978 through 1995 suggests that rating standards have indeed become more stringent, implying that at least part of the downward trend in ratings is the result of changing standards.
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Statistical Models of Bond Ratings: A Methodological Inquiry
Robert S. Kaplan,Gabriel Urwitz +1 more
TL;DR: In this paper, a simple linear model using a subordination dummy variable, total assets, the long-term debt to total assets ratio, and the common stock systematic risk measure can correctly classify two-thirds of a holdout sample of newly issued bonds.