TY - JOUR
T1 - The impact of issuer-pay on corporate bond rating properties
T2 - Evidence from Moody's and S&P's initial adoptions
AU - Bonsall, Samuel
PY - 2014/4/1
Y1 - 2014/4/1
N2 - This study examines whether and how the properties of corporate bond ratings change following Moody[U+05F3]s and S&P[U+05F3]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.
AB - This study examines whether and how the properties of corporate bond ratings change following Moody[U+05F3]s and S&P[U+05F3]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.
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U2 - 10.1016/j.jacceco.2014.01.001
DO - 10.1016/j.jacceco.2014.01.001
M3 - Article
AN - SCOPUS:84893680056
SN - 0165-4101
VL - 57
SP - 89
EP - 109
JO - Journal of Accounting and Economics
JF - Journal of Accounting and Economics
IS - 2-3
ER -