Does it matter who pays for bond ratings? Historical evidence

We test whether Standard and Poorʹs (S&P) assigns higher bond ratings after it switches from investor-pay to issuer-pay fees in 1974. Using Moodyʹs rating for the same bond as a benchmark, we find that when S&P charges investors and Moodyʹs charges issuers, S&Pʹs ratings are lower than Moodyʹs. Once S&P adopts issuer-pay, its ratings increase and no longer differ from Moodyʹs. More importantly, S&P only assigns higher ratings for bonds that are subject to greater conflicts of interest, measured by higher expected rating fees or lower credit quality. These findings suggest that the issuer-pay model leads to higher ratings.