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Does it matter who pays for bond ratings? Historical evidence

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

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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