“Did going public impair Moody’s credit ratings?” by Simi Kedia
Rutgers Business School
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 outstanding corporate bonds are significantly more favorable to issuers relative to S&P‘s after Moody‘s initial public offering (IPO) in 2000. The higher ratings assigned by Moody‘s after its IPO are more pronounced for clients that are large issuers of structured finance products and operate in the financial industry, consistent with testimonies that easier rating standards originated in the structured finance products group of Moody‘s. Moody‘s ratings are also more favorable for clients where Moody‘s is likely to face larger conflicts of interest: (i) large issuers; (ii) firms that are more likely to benefit from higher ratings, on the margin; and (iii) in industries with greater competition from Fitch. Moody‘s higher ratings, post IPO, are also less informative when accuracy is measured as expected default frequencies (EDFs) or as the likelihood of bond defaults. Our findings have implications for incentives created by a public offering for capital market gatekeepers and professional firms.