Contrary to assertions by the Big 3 credit raters, we demonstrate that credit ratings are not comparable across asset classes. Default frequencies, ratings transition matrices, hazard rate models, and ratings adjustment regressions all indicate that differences exist across asset classes both in the levels of credit ratings and the distributions of their changes. Relative to traditional corporate bond ratings, municipal and sovereign bonds have been rated more harshly and structured products have been rated more generously. These findings exist to varying degrees throughout our entire 30-year sample period. Consistent with a conflict of interest in an issuer-pays compensation structure, ratings standards are inversely correlated with revenue generation among the asset classes. Our results are less consistent with the more benign explanation that ratings inflation is a result of issuer opacity. These results contribute to the debate surrounding regulatory reliance on credit ratings and the current SEC proposal to standardize credit ratings across asset class.
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