Determinants of the Credit Rating Fee in the Municipal Bond Market

Abstract

Improving transparency of prices paid by government can improve market and government efficiency. Governments regularly pay to access capital markets, yet municipal bond issuance costs remain largely hidden from public view. This study examines factors associated with credit rating fees using a decade of Texas municipal bond issuance data. We find that rating fees are lower in a competitive environment, when issuers have experience and a relationship with the rating agency, and higher when the issue is large and more complex. The findings provide evidence that credit rating agencies (CRAs) retained pricing power following the credit crisis despite reduced reputational quality.

Do Rating Agencies Benefit from Providing Higher Ratings? Evidence from the Consequences of Municipal Bond Ratings Recalibration

“…Following prior literature (e.g., Ely, Martell, and Kioko []), we include bond issue characteristics as controls: bond issue size ( Ln ( Par )), whether the bond is insured ( Insured ), whether the sale type is competitive bidding ( Competitive ), whether the bond is a revenue bond ( Revenue bond ), and whether the financial advisor involved in the bond issue is the leader in the state ( Leadfin ). The appendix provides variable definitions.…”

“…Our paper complements the examination by Ely, Martell, and Kioko [2013] of the determinants of ratings fees by focusing on whether attributes of the issuer-pay model, such as paying more for better ratings, affect ratings fees. Our paper also complements existing research considering the pros and cons of issuer-pay models in both the audit and credit ratings markets by demonstrating that in the municipal debt market, borrowers' incentives to obtain improved credit ratings affect the choice of ratings agency and the fees paid.…”

“…As a result, we only examine bonds rated by one ratings agency in California. 6 Although bond characteristics could possibly affect the fees of S&P versus Moody's or Fitch differently, Ely, Martell, and Kioko [2013] find that characteristics such as par value, insurance/enhancement, and type of bond (i.e., revenue versus GO bond), similarly affect fees across ratings agencies. We find that these controls largely have no effect on the differential fees.…”

Municipal bond sectoral risk and information intermediation in uncertain times: Evidence from the Covid‐19 pandemic

“…Information intermediaries address this asymmetry by providing third‐party certification. Credit rating agencies evaluate the issuer's fiscal position and ability to service the debt, providing their initial and ongoing judgment and increasing investor confidence (Ely et al, 2013; Millon & Thakor, 1985). By demonstrating the willingness to underwrite and through information collected in the underwriting process, underwriters provide a signal of the creditworthiness of the bond to investors (Booth & Smith, 1986; Campbell & Kracaw, 1980; Klein & Leffler, 1981).…”

Capital management: advancing theory and practice

“…Instead, careful capital management while being responsive to the public needs is the essential element for good credit rating. Later, Ely, Martell andKioko (2013), Johnson, Kioko andHildreth (2012) and Schelker (2012) add that the size and transparency of debt issued, financial statement information, and state auditor term length and limits have a significant impact on long-term debt ratings. Other studies confirm that credit rating agencies pay attention to management quality (Denison, Yan & Zhao 2007;Zhao & Guo, 2011); political stability (Kruger & Walker 2008); and citizens' right laws (Yinger, 2010) when determining credit rates.…”