Estimating the costs of issuer-paid credit ratings

Research output: Contribution to journalArticle

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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.

Original languageEnglish (US)
Pages (from-to)2229-2269
Number of pages41
JournalReview of Financial Studies
Volume26
Issue number9
DOIs
StatePublished - Sep 1 2013

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All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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