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Does it matter who pays for bond ratings? Historical evidence

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

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    File URL: http://www.sciencedirect.com/science/article/pii/S0304405X1200061X
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 105 (2012)
    Issue (Month): 3 ()
    Pages: 607-621

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    Handle: RePEc:eee:jfinec:v:105:y:2012:i:3:p:607-621

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Credit ratings; Investor pay; Issuer pay; Moody's; S&P;

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    References

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    Cited by:
    1. Xia, Han, 2014. "Can investor-paid credit rating agencies improve the information quality of issuer-paid rating agencies?," Journal of Financial Economics, Elsevier, vol. 111(2), pages 450-468.
    2. Erik Berwart & Massimo Guidolin & Andreas Milidonis, 2013. "An Empirical Analysis of Changes in the Relative Timeliness of Issuer-Paid vs. Investor-Paid Ratings," Working Papers 482, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    3. Gwion Williams & Rasha Alsakka & Owain ap Gwilym, 2013. "The Impact of Sovereign Credit Signals on Bank Share Prices during the European Sovereign Debt Crisis," Working Papers 13007, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).

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