Dual Bond Ratings: A Test of the Certification Function of Rating Agencies |
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| Authors: | G. Rodney Thompson Peter Vaz |
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| Affiliation: | Virginia Polytechnic Institute and State University, Blacksburg, VA 24061.;New School for Social Research, New York, NY 10011. The authors thank Randall S. Billingsley, Richard Borgman, Robert E. Lamy, Paul Hsueh, and two anonymous referees for helpful discussion and comments in the development of this paper. |
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| Abstract: | Bond researchers have recently observed that issues with split ratings have yields more closely resembling the yields on bonds with the lower of the two ratings. This evidence could lead researchers to question why an issuer ever obtains more than one rating in an environment where two ratings, when split, can never reduce yields, whereas two ratings, when split, can increase yields. This paper explores the rating function in a certification framework and concludes that investors value a second rating. Bond issues with two identical ratings have yields significantly less than issues receiving that rating from only one rating agency. |
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