Ratings Shopping in the Municipal Bond Market: Evidence from Ratings Recalibrations

• In Event: Credit ratings

Abstract

We investigate whether an exogenous shock to the debt ratings of governmental entities is associated with changes in the ratings fees. Specifically, in April 2010 both Fitch and Moody’s recalibrated their debt ratings for thousands of municipal bonds, increasing ratings without any underlying change in credit quality. We use this shock to investigate whether higher debt ratings are associated with higher fees or increases in market share. Consistent with concerns raised by critics of the issuer pay model, we find that compared to S&P, the entities rated by Moody’s and Fitch received better ratings, were charged higher fees, and issued bonds with lower yields. This recalibration also led to increases in Fitch and Moody’s market share. Overall the results are consistent with the issuer pay model being associated with ratings shopping.

Authors

• Anne Beatty, Ohio State University

• Jacquelyn Gillette, Massachusetts Institute of Technology

• Reining Petacchi, Georgetown University

• Joseph P Weber, Massachusetts Institute of Technology