Journal of Accounting and Economics Vol. 57 No. 2-3 2014
The impact of issuer-pay on corporate bond rating properties: Evidence from Moody׳s and S&P׳s initial adoptions
Abstract
This study examines whether and how the properties of corporate bond ratings change following Moody׳s and S&P׳s adoptions of the issuer-pay business model in the early 1970s. Regulators and debt market observers have criticized the issuer-pay model for creating an independence problem. However, the issuer-pay model allows for economic bonding between rating agencies and issuers through explicit contractual arrangements, which should improve the flow of nonpublic information. Using a difference-in-difference research design, I find that more optimistic ratings by issuer-pay rating agencies predict greater future profitability, differences between the ratings of issuer-pay and investor-pay rating agencies are associated with narrower secondary bond market bid-ask spreads, and that issuer-pay rating agencies become relatively more accurate and timely predictors of default compared to investor-pay agencies after the adoption of issuer-pay. These results reinterpret the recent findings of optimistic ratings by Jiang et al. (2012) as consistent with more informative bond ratings.
- DOI
- 10.1016/j.jacceco.2014.01.001
- Volume
- 57
- Issue
- 2-3
- Pages
- 89-109
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib