The impact of issuer-pay on corporate bond rating properties: : Evidence from Moody's and S&P's initial adoptions

• Autores: Samuel B. Bonsall IV
• Localización: Journal of accounting and economics, ISSN 0165-4101, Vol. 57, Nº. 2-3, 2014, págs. 89-109
• Idioma: inglés
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• Resumen

  • 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 as consistent with more informative bond ratings.