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Rating Agency Fees: Pay to Play in Public Finance?

Author

Listed:
  • Jess Cornaggia
  • Kimberly J Cornaggia
  • Ryan Israelsen

Abstract

We examine the relationship between credit rating levels and rating agency fees in a public finance market in which rating agencies earn lower fees and face higher disclosure requirements relative to corporate bond and structured finance markets. Controlling for variation in the complexity of credit analysis at the issue level, we find evidence that rating agency conflicts of interest distort credit ratings in the municipal bond market. Unexpectedly expensive ratings are more likely downgraded, and inexpensive ratings are more likely upgraded. The relationship between credit ratings and rating agency fees is driven by issuers who lose access to AAA insurance.

Suggested Citation

  • Jess Cornaggia & Kimberly J Cornaggia & Ryan Israelsen, 2023. "Rating Agency Fees: Pay to Play in Public Finance?," The Review of Financial Studies, Society for Financial Studies, vol. 36(5), pages 2004-2045.
    • Handle: RePEc:oup:rfinst:v:36:y:2023:i:5:p:2004-2045.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhac073
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    More about this item

    JEL classification:

    • 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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