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Moody's and S&P Ratings: Are They Equivalent? Conservative Ratings and Split Rated Bond Yields

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  • MILES LIVINGSTON
  • JIE (DIANA) WEI
  • LEI ZHOU

Abstract

We examine the relative impact of Moody's and S&P ratings on bond yields and find that at issuance, yields on split rated bonds with superior Moody's ratings are about 8 basis points lower than yields on split rated bonds with superior S&P ratings. This suggests that investors differentiate between the two ratings and assign more weight to the ratings from Moody's, the more conservative rating agency. Moody's becomes more conservative after 1998 and the impact of a superior Moody's rating becomes stronger. Furthermore, the differential impact of the two ratings is more pronounced for the more opaque Rule 144A issues. Copyright (c) 2010 The Ohio State University.

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  • Miles Livingston & Jie (Diana) Wei & Lei Zhou, 2010. "Moody's and S&P Ratings: Are They Equivalent? Conservative Ratings and Split Rated Bond Yields," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1267-1293, October.
  • Handle: RePEc:mcb:jmoncb:v:42:y:2010:i:7:p:1267-1293
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    Citations

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    Cited by:

    1. Schaetzle, Dominik, 2011. "Ökonomische Funktionen von Ratingagenturen: Ratingagenturen in der neoinstitutionalistischen Finanzierungstheorie," Arbeitspapiere 113, University of Münster, Institute for Cooperatives.
    2. Daniel Rösch & Harald Scheule, 2011. "Securitization rating performance and agency incentives," BIS Papers chapters,in: Bank for International Settlements (ed.), Portfolio and risk management for central banks and sovereign wealth funds, volume 58, pages 287-314 Bank for International Settlements.
    3. Pilar Abad Romero & Maria Dolores Robles Fernández, 2014. "The Risk-Return binomial after rating changes," Documentos de Trabajo del ICAE 2014-23, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    4. repec:eee:jimfin:v:79:y:2017:i:c:p:39-71 is not listed on IDEAS
    5. De Santis, Roberto A. & Stein, Michael, 2015. "Financial indicators signaling correlation changes in sovereign bond markets," Journal of Banking & Finance, Elsevier, vol. 56(C), pages 86-102.
    6. Daniel Rösch & Harald Scheule, 2014. "Forecasting Mortgage Securitization Risk Under Systematic Risk and Parameter Uncertainty," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 81(3), pages 563-586, September.
    7. Paula Hill & Robert Faff, 2010. "The Market Impact of Relative Agency Activity in the Sovereign Ratings Market," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(9-10), pages 1309-1347, November/.
    8. Abad, Pilar & Robles, M. Dolores, 2014. "Credit rating agencies and idiosyncratic risk: Is there a linkage? Evidence from the Spanish Market," International Review of Economics & Finance, Elsevier, vol. 33(C), pages 152-171.
    9. Boumparis, Periklis & Milas, Costas & Panagiotidis, Theodore, 2017. "Economic policy uncertainty and sovereign credit rating decisions: Panel quantile evidence for the Eurozone," Journal of International Money and Finance, Elsevier, vol. 79(C), pages 39-71.
    10. Donato Masciandaro, 2013. "Sovereign debt: financial market over-reliance on credit rating agencies," BIS Papers chapters,in: Bank for International Settlements (ed.), Sovereign risk: a world without risk-free assets?, volume 72, pages 50-62 Bank for International Settlements.
    11. Boumparis, Periklis & Milas, Costas & Panagiotidis, Theodore, 2015. "Has the crisis affected the behavior of the rating agencies? Panel evidence from the Eurozone," Economics Letters, Elsevier, vol. 136(C), pages 118-124.
    12. Hauck, Achim & Neyer, Ulrike, 2014. "Disagreement between rating agencies and bond opacity: A theoretical perspective," Economics Letters, Elsevier, vol. 123(1), pages 82-85.
    13. Tewari, Manish & Byrd, Anthony & Ramanlal, Pradipkumar, 2015. "Callable bonds, reinvestment risk, and credit rating improvements: Role of the call premium," Journal of Financial Economics, Elsevier, vol. 115(2), pages 349-360.
    14. Vu, Huong & Alsakka, Rasha & Gwilym, Owain ap, 2015. "The credit signals that matter most for sovereign bond spreads with split rating," Journal of International Money and Finance, Elsevier, vol. 53(C), pages 174-191.

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