Are Investor-paid Credit Ratings Superior?

We examine and compare corporate bond rating standards, discriminatory power, stability, and market impact of investor-paid and issuer-paid ratings. We find no consistent evidence of investor-paid Egan-Jones ratings being more stringent or having higher discriminatory power of default risk. Instead, issuer-paid ratings by Moody’s and S&P are lower and, in general, provide earlier warnings of defaults. On the other hand, Egan-Jones updates its ratings more frequently with fewer multiple-notch downgrades, suggesting the investor-paid rating agency caters more to investors’ demand for timely information updates. Finally, market responses to issuer-paid rating changes are stronger