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Does the market differentiate between investor-paid and issuer-paid ratings in the pricing of asset-backed securities?

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  • Liu, Xiaojian
  • Chong, Beng Soon
  • Feng, Xiaozhi

Abstract

We examine the relative effects of investor-paid and issuer-paid ratings on the at-issuance pricing of China's asset-backed securities (ABS). In theory, issuer-paid ratings are more prone to rating inflation but are more informative than investor-paid ratings. Empirically, we find that investor-paid ratings are significantly more conservative than issuer-paid ratings, on average. Also, the market does differentiate between issuer-and investor-paid ratings in ABS pricing. For split rated issues, the yield spread is higher if the inferior rating is from an investor-paid rating agency. Furthermore, the relative credibility of investor-paid ratings over issuer-paid ratings is asymmetric and largely applicable to inferior ratings.

Suggested Citation

  • Liu, Xiaojian & Chong, Beng Soon & Feng, Xiaozhi, 2023. "Does the market differentiate between investor-paid and issuer-paid ratings in the pricing of asset-backed securities?," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    • Handle: RePEc:eee:pacfin:v:79:y:2023:i:c:s0927538x23000938
    DOI: 10.1016/j.pacfin.2023.102027
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    References listed on IDEAS

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    More about this item

    Keywords

    Issuer-paid rating; Investor-paid rating; Conflicts of interest; Rating inflation; Rating shopping; Rating catering; Rating Informativeness; Rating credibility;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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