New Bond Rating Classification Accuracy

Whether new issues of municipalities previously unrated differ from new issues of previously rated municipalities is explored using Moody's bond ratings for Minnesota cities during the period 1977-1980. During this period, Moody's issued new bond ratings to 62 governments. These ratings were compared only with ratings given to cities that issued bonds simultaneously with the new ratings. The study used multiple discriminant analysis (MDA) to test classification accuracy in determining if the 62 new cities were similar to the 109 old cities included. The results indicate that there is no significant difference in the bond ratings given to issues by the newly rated cities and those of previously rated municipalities. The conservative rating hypothesis and the rating history hypothesis are both rejected. No support is found for the investment grade hypothesis, and most new cities receive a rating higher than the minimum investment grade. The ratings were accurate relative to the ratings of old cities.