Does the market perceive a difference in rating agencies?

A frequent and recent topic in the financial press concerns the two major rating agencies, Moody’s and Standard & Poor’s. The reported perception is that Moody’s is less credible. In this study, we determine whether the market shares this perception and whether this perception carries an economic cost. Since there are many features attached to a bond issue that affect its yield, differences in bond rating cannot be tested in isolation. This paper estimates the impact of differences in ratings as well as several other key bond features (call and sinking fund features, and syndication) of public issues of corporate bonds using regression analysis over the period 1986 through 1996. All features tested except the sinking fund option for doubling and tripling the amount of funds retired are found to be significant including the variable measuring the market’s perception of the informational content of ratings from the two rating agencies. Thus, we conclude that the market finds value in the ratings from each agency, but that the value is not symmetrical between the two agencies. There is not enough evidence that the market values one agency over the other.