Does SEC Rating Agency Certification Matter? The Case of A.M. Best

Some previous researchers such as Partnoy (1999, 2001) argue that the reputation of credit rating agencies such as Moody¡¯s and S&P¡¯s may result from designation as a Nationally Recognized Statistical Rating Organization (NRSRO) by the SEC. By examining bond ratings for issues rated by A.M. Best and the yields of bonds rated by A.M. Best before and after the agency¡¯s receipt of the NRSRO designation, we examine the impact of NRSRO designation on the ratings of a credit rating agency and whether investor perception of the agency changed after receipt of the NRSRO designation. A.M. Best is an American credit rating agency that has specialized in the insurance industry for over 100 years. The agency was founded in 1899 and was given NRSRO designation on March 3, 2005. A.M. Best likely possessed a high level of expertise in assigning ratings in the insurance industry as well as an established reputation prior to being designated as an NRSRO. By examining the ratings assigned by A.M. Best and the yields of the bonds the agency rated, our empirical results indicate that neither the ratings assigned by A.M. Best or yields of the rated bonds changed after A.M. Best received NRSRO designation. Our findings suggest that the NRSRO designation does not affect the rating of A.M. Best or the perception of investors toward the credit risk of the bonds rated by the agency. Our findings are different from those of Shin and Moore (2008) and Kisgen and Strahan (2010), which examine the NRSRO designation of Dominion Bond Rating Service (DBRS) in Canada.