Corporate Bond Credit Rating Biases: Issuance Frequency and Yield Spreads

Abstract: We investigate whether rating agencies (S&P, Moody's and Fitch) award firms who issue corporate bonds frequently, and thereby contributing substantially to rating agencies' revenues, by providing unjustifiably high rating assessments. We also investigate the same bias for firm size and issue size. Testing data of US corporate bonds, we can report that there is a systematic bias toward frequent issuers. We find that frequent issuers' corporate bonds have systematically lower yields at issue, but also that the yield spread converges during post-issue trading; the prices of bonds sold by both frequent and Other issuers increase when introduced to the secondary market, but those sold by Other issuers appreciate to a greater extent