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Dual Bond Ratings: A Test of the Certification Function of Rating Agencies

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  • Thompson, G Rodney
  • Vaz, Peter

Abstract

Bond researchers have recently observed that issues with split ratings have yields more closely resembling the yields on bonds with the lower of the two ratings. This evidence could lead researchers to question why an issuer ever obtains more than one rating in an environment where two ratings, when split, can never reduce yields, whereas two ratings, when split, can increase yields. This paper explores the rating function in a certification framework and concludes that investors value a second rating. Bond issues with two identical ratings have yields significantly less than issues receiving that rating from only one rating agency. Copyright 1990 by MIT Press.

Suggested Citation

  • Thompson, G Rodney & Vaz, Peter, 1990. "Dual Bond Ratings: A Test of the Certification Function of Rating Agencies," The Financial Review, Eastern Finance Association, vol. 25(3), pages 457-471, August.
  • Handle: RePEc:bla:finrev:v:25:y:1990:i:3:p:457-71
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    Citations

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    Cited by:

    1. Ginger Zhe Jin & Andrew Kato & John A. List, 2010. "That'S News To Me! Information Revelation In Professional Certification Markets," Economic Inquiry, Western Economic Association International, vol. 48(1), pages 104-122, January.
    2. Arthur Allen & Donna Dudney, 2008. "The Impact of Rating Agency Reputation on Local Government Bond Yields," Journal of Financial Services Research, Springer;Western Finance Association, vol. 33(1), pages 57-76, February.
    3. Kriz, Kenneth A., 2003. "Comparative costs of negotiated versus competitive bond sales: new evidence from state general obligation bonds," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(2), pages 191-211.
    4. repec:bla:pbudge:v:37:y:2017:i:2:p:83-101 is not listed on IDEAS
    5. Fairchild, Lisa M. & Koch, Timothy W., 1998. "The Impact of State Disclosure Requirements on Municipal Yields," National Tax Journal, National Tax Association, vol. 51(n. 4), pages 733-53, December.
    6. Volker G. Heinke, 2006. "Credit spread volatility, bond ratings and the risk reduction effect of watchlistings," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(4), pages 293-303.
    7. Arthur Allen & George Sanders & Donna Dudney, 2009. "Should more local governments purchase a bond rating?," Review of Quantitative Finance and Accounting, Springer, vol. 32(4), pages 421-438, May.
    8. Schaetzle, Dominik, 2011. "Ratingagenturen in der neoklassischen Finanzierungstheorie: Eine Auswertung empirischer Studien zum Informationsgehalt von Ratings," Arbeitspapiere 110, University of M√ľnster, Institute for Cooperatives.
    9. Balasubramnian, Bhanu & Cyree, Ken B., 2011. "Market discipline of banks: Why are yield spreads on bank-issued subordinated notes and debentures not sensitive to bank risks?," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 21-35, January.
    10. Mattarocci, Gianluca, 2005. "Il rapporto tra impresa e agenzia di rating: la soluzione del multi-rating," MPRA Paper 4295, University Library of Munich, Germany, revised Mar 2005.
    11. Kish, Richard J. & Hogan, Karen M. & Olson, Gerard, 1999. "Does the market perceive a difference in rating agencies?," The Quarterly Review of Economics and Finance, Elsevier, vol. 39(3), pages 363-377.
    12. Santos, Joao A.C., 2006. "Why firm access to the bond market differs over the business cycle: A theory and some evidence," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2715-2736, October.
    13. Fairchild, Lisa M. & Koch, Timothy W., 1998. "The Impact of State Disclosure Requirements on Municipal Yields," National Tax Journal, National Tax Association, vol. 51(4), pages 733-753, December.
    14. Richard Cantor & Frank Packer & Kevin Cole, 1997. "Split ratings and the pricing of credit risk," Research Paper 9711, Federal Reserve Bank of New York.
    15. Bae, Sung C. & Klein, Daniel P., 1997. "Further evidence on corporate bonds with event-risk covenants: Inferences from Standard and Poor's and Moody's bond ratings," The Quarterly Review of Economics and Finance, Elsevier, vol. 37(3), pages 709-724.

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