Can investor-paid credit rating agencies improve the information quality of issuer-paid rating agencies?

This paper examines how the information quality of ratings from an issuer-paid rating agency (Standard and Poorʹs) responds to the entry of an investor-paid rating agency, the Egan-Jones Rating Company (EJR). By comparing S&Pʹs ratings quality before and after EJR initiates coverage of each firm, I find a significant improvement in S&Pʹs ratings quality following EJRʹs coverage initiation. S&Pʹs ratings become more responsive to credit risk and its rating changes incorporate higher information content. These results differ from the existing literature documenting a deterioration in the incumbentsʹ ratings quality following the entry of a third issuer-paid agency. I further show that the issuer-paid agency seems to improve the ratings quality because EJRʹs coverage has elevated its reputational concerns.