SHOULD ALL TAX-EXEMPT BORROWERS WITH INVESTMENT-GRADE QUALITY ACQUIRE CREDIT RATINGS?

Credit ratings help reveal and certify borrowers' quality in a market with information asymmetry. Examination is offered of the quality revelation and certification values of a bond rating in the tax-exempt bond market in which a high percentage of new issues are not rated. It is shown that larger borrowers whose bond issues are targeted at national markets benefit more from acquiring a bond rating than smaller/local borrowers. The findings not only provide a plausible explanation why investment-grade quality borrowers may choose not to acquire a credit rating, but also are consistent with the observation that most nonrated tax-exempt bonds are relatively small in issue size.