The Impact Rating Agency Reputation on Local Government Bond Yields

This study examines a sample of 12,562 dual-rated local government bond issues
including 6,104 split-rated issues to determine which rating agency has the greatest impact
on yields. Using a database of municipal bond issues from 1986 to 2002, we show that
Moody’s rated significantly more issues than S&P, and that Moody’s ratings were more
conservative. However, from 1993 to 1997, there was a reduction in ratings disagreements
and in Moody’s market share. Beginning in 1995, Moody’s received negative publicity
related to a Department of Justice anti-trust investigation. Moody’s appears to have
responded by sharply increasing their relative conservatism in 1997. From 1986 to 1994,
Moody’s ratings had a greater impact on bond yields than S&P ratings, but their dominant
influence on yields disappears in the recent sample period from 1995 to 2002.

Publication Information
Article Title: The Impact Rating Agency Reputation on Local Government Bond Yields
Journal: Journal of Financial Services Research (Feb, 2008)
Vol. 33, No. 1, pp. 57-76
Author(s): Allen, Arthur C;  Dudney, Donna
Researcher Information
Allen, Arthur C
Allen, Arthur C
Associate Professor
  • Financial Accounting
  • Governmental and Nonprofit Accounting
HLH 445 J
P.O. Box 880488
University of Nebraska-Lincoln
Lincoln, NE 68588-0488, USA
Phone: (402) 472-3275
Fax: (402) 472-4100
Dudney, Donna
Dudney, Donna
Associate Dean of Undergraduate Curriculum and Programs
  • Financial Institutions
  • Financial Markets & Investing
  • Managerial Economics
Office of the Dean
HLH 301 G
P.O. Box 880405
University of Nebraska-Lincoln
Lincoln, NE 68588-0405, USA
Phone: (402) 472-5695
Fax: (402) 472-5180