Did Going Public Impair Moody’s Credit Ratings?
Research Seminars
Academic Areas Finance
Simi Kedia, Professor of Finance and Economics Rutgers Business School Rutgers University
January 22, 2013
| 3:00 PM - 4:30 PM | Tuesday
AC2MLT, hyderabad, Hyderabad, India
For ISB Community
Abstract:
We investigate a prominent allegation in Congressional hearings that Moody’s loosened its standards for assigning credit ratings after it went public in the year 2000 in an attempt to chase market share and increase revenue. We exploit a difference-in-difference design by benchmarking Moody’s ratings with those assigned by its rival S&P before and after 2000. Consistent with Congressional allegations, we find that Moody’s credit ratings for new and existing corporate bonds are significantly more favorable to issuers relative to S&P’s after Moody’s initial public offering (IPO) in 2000. Moreover, such relative loosening of credit standards at Moody’s after its IPO is more pronounced for clients where Moody’s is likely to face larger conflicts of interest: (i) large issuers; and (ii) firms that are more likely to benefit from better ratings, on the margin. Our findings have implications for incentives created by a public offering for capital market gatekeepers and professional firms
We investigate a prominent allegation in Congressional hearings that Moody’s loosened its standards for assigning credit ratings after it went public in the year 2000 in an attempt to chase market share and increase revenue. We exploit a difference-in-difference design by benchmarking Moody’s ratings with those assigned by its rival S&P before and after 2000. Consistent with Congressional allegations, we find that Moody’s credit ratings for new and existing corporate bonds are significantly more favorable to issuers relative to S&P’s after Moody’s initial public offering (IPO) in 2000. Moreover, such relative loosening of credit standards at Moody’s after its IPO is more pronounced for clients where Moody’s is likely to face larger conflicts of interest: (i) large issuers; and (ii) firms that are more likely to benefit from better ratings, on the margin. Our findings have implications for incentives created by a public offering for capital market gatekeepers and professional firms
