Home      Login

Abstract: 

Traditionally, most issuers selling new debt obtain a credit rating from one of the two nationally known private rating agencies—Moody’s Investors Services (Moody’s) or Standard & Poor’s. Issuers have recently come to look at Fitch IBCA, Duff & Phelps (Fitch) as a viable alternative for a credit rating as well. It is now common for debt issuers to obtain two, and sometimes three, credit ratings on a debt issue. State governments have been at the forefront of this multiple-ratings trend. Indeed, it is now uncommon for a state government to receive only one rating on a general obligation (GO) bond issue. Most states obtain two or three ratings before coming to market. This new practice raises a fundamental question: What benefits do state issuers receive from an additional credit rating? The purpose of this article is to analyze why borrowers obtain three credit ratings on their debt and to determine whether the perceived interest cost advantage of obtaining additional ratings is real. In this study, we use a sample of state GO bonds sold for general governmental purposes in the United States from 1994 to 1997. After reviewing previous research on the certification role of credit rating agencies, the article explains the methodology used in this study, describes the data collected in the study, and discusses the study’s empirical results.

Keywords: 

Affiliations:  1: School of Public and Environmental Affairs, Indiana University; 2: Hubert H. Humphrey Institute of Public Affairs, University of Minnesota.