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| Why Do Firms Pay for Bond Ratings When They Can Get Them for Free? (Job Market Paper) by Yingjin Hila Gan of the University of Pennsylvania November 21, 2004 Abstract: I investigate whether rating agencies (Moody's and S&P) use consistent standards in solicited and unsolicited ratings, that is, whether agencies treat issuers who pay for the service (solicited rating) differently from those who do not pay (unsolicited rating). I find that both agencies give significantly lower ratings to unsolicited issues. However, I do not find a significant difference between the performances of solicited and unsolicited issues. The results are consistent with the hypothesis that rating agencies give worse ratings to un-soliciting issuers not as blackmail, but rather as a necessary adjustment for the difference in the true and unobserved quality. Holding public information constant, issuers with better private information self select into the soliciting group since by disclosing the private information to the agencies they can receive higher ratings. The results in this paper do not lend support for more stringent regulation on the rating agencies. Download paper (175K PDF) 5147 pages [Home] [Other Credit Risk Papers]  |   
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