The views expressed are those of the authors and do not necessarily reflect those of the Bank of England. We thank Angus Guyatt for outstanding research support. We thank Reza Bahar, Patricia Jackson and other Bank of England colleagues for valuable comments and Angus Guyatt and Steve Grice for research assistance. Copies of working papers may be obtained from Publications Group, Bank of England,

insights with me. Comments and suggestions from seminar participants at the Wharton school, University of Pennsylvania are gratefully acknowledged. All omissions and errors are my own. Why Do Firms Pay for Bond Ratings When They Can Get Them for Free? I investigate whether rating agencies (Moody’s and S&P) use consistent standards in solicited and unsolicited ratings, that is, whether agencies treat issuers who pay for the service (solicited rating) differently from those who do not pay (unsolicited rating). I find that both agencies give significantly lower ratings to unsolicited issues. However, I do not find a significant difference between the performances of solicited and unsolicited issues. The results are consistent with the hypothesis that rating agencies give worse ratings to un-soliciting issuers not as blackmail, but rather as a necessary adjustment for the difference in the true and unobserved quality. Holding public information constant, issuers with better private information self select into the soliciting group since by disclosing the private information to the agencies they can receive higher ratings. The results in this paper do not lend support for more stringent regulation on the rating agencies. 1 1.

We examine a company’s decision to issue public debt for the first time by analyzing its behavior around the time of obtaining its first debt rating. Contrary to our expectations, we find that firms are more likely to pay dividends in the years prior to the initial rating rather than at or after the announcement date, and that the amount of dividend payments actually appears to decline (rather than increase). We posit that this may be attributable to the fact that firms initiate and/or increase dividend payments in anticipation of accessing the public debt markets for the first time. This behavior leads us to consider other actions that firms might undertake in preparation for this event. We go on to find that firms ’ stock prices fall in the period following their initial debt rating. Further, there is strong evidence that earnings drop afterwards. We argue that these observations are consistent with the fact that firms “time ” their decision to access public debt markets to follow periods of strong share price and earnings performance. This leads us to consider the possibility that companies may actively “manage ” their earnings to make them appear as attractive as possible in the pre-rating period, and we find evidence to support this assertion.