Did going public impair Moody's credit ratings?

• Published in: Journal of financial economics Vol. 114; no. 2; pp. 293 - 315
• Main Authors: Kedia, Simi, Rajgopal, Shivaram, Zhou, Xing
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier Sequoia S.A 01-11-2014
• Subjects: Access to credit; Congressional hearings; Corporate bonds; Credit ratings; Default; Financial economics; Going public; Initial public offering; Probability; Public finance; Rating services; Revenue; Studies; U.S.A; United States > US
• ISSN: 0304-405X; 1879-2774
• DOI: 10.1016/j.jfineco.2014.07.005

We investigate a prominent allegation in congressional hearings that Moody's loosened its rating standards to chase revenue after it went public in 2000. Consistent with this allegation, Moody's ratings for both corporate bonds and structured finance products are significantly more favorable to issuers, relative to S&P's, after Moody's IPO. Moreover, Moody's ratings are more favorable for clients subject to greater conflict of interest. There is little evidence that Moody's higher ratings, post-IPO, are more informative, measured as expected default frequencies (EDFs) or as the probability of default. Our findings inform the debate on whether financial gatekeepers should be publicly traded.