Should more local governments purchase a bond rating?

We investigate whether issuers that choose to forgo a bond rating suffer an interest cost penalty greater than the cost of the rating. We use estimated ratings provided by Moody’s Investor Service to proxy for what the rating would have been if it had been purchased. We find that the primary factors...

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Bibliographic Details
Published in:Review of quantitative finance and accounting 2009-05, Vol.32 (4), p.421-438
Main Authors: Allen, Arthur, Sanders, George, Dudney, Donna
Format: Article
Language:English
Subjects:
Accounting/Auditing
Bias
Bond issues
Bond markets
Bond ratings
Bonds
Corporate Finance
Cost control
Costs
Default
Econometrics
Economics and Finance
Finance
Financial economics
Interest
Interest costs
Local government
Municipal bonds
Operations Research/Decision Theory
Original Research
Ratings & rankings
Studies
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Summary:We investigate whether issuers that choose to forgo a bond rating suffer an interest cost penalty greater than the cost of the rating. We use estimated ratings provided by Moody’s Investor Service to proxy for what the rating would have been if it had been purchased. We find that the primary factors associated with an issuer’s decision to purchase a rating are the rating expected by the issuer and the extent to which an issue is marketed locally. After controlling for self-selection bias, we find that the issuers that forgo a rating do not suffer an interest cost penalty.
ISSN:0924-865X
1573-7179
DOI:10.1007/s11156-008-0095-6