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Estimating the Costs of Issuer-Paid Credit Ratings

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  • Jess Cornaggia
  • Kimberly J. Cornaggia

Abstract

We compare the stability and timeliness of credit ratings produced by a traditional issuer-paid rating agency (Moody's Investors Service) and a subscriber-paid rater (Rapid Ratings). Moody's ratings exhibit less volatility but are slower to identify default risk. We control for Moody's aversion to ratings volatility and still find its ratings lag Rapid Ratings'. More importantly, accuracy ratios indicate that Rapid Ratings provides a better ordinal ranking of credit risk. We quantify the loss avoidance associated with Rapid Ratings'signals to estimate costs associated with regulatory and contractual systems based on issuer-paid ratings. The Author 2013. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Suggested Citation

  • Jess Cornaggia & Kimberly J. Cornaggia, 2013. "Estimating the Costs of Issuer-Paid Credit Ratings," The Review of Financial Studies, Society for Financial Studies, vol. 26(9), pages 2229-2269.
    • Handle: RePEc:oup:rfinst:v:26:y:2013:i:9:p:2229-2269
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    File URL: http://hdl.handle.net/10.1093/rfs/hht041
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