Moody's and S&P Ratings: Are They Equivalent?

Conservative Ratings and Split Rated Bond Yields

Miles Livingston University of Florida and Erasmus University P.O. Box 117168 Gainesville, FL 32611-7168 Phone: (352) 392-4316 Fax: (352) 392-0301

Jie (Diana) Wei* Office of the Comptroller of the Currency Washington, DC 20219 Phone: (202)874-6532 Fax: (202) 874-5394

Lei Zhou Northern Illinois University College of Business Department of Finance DeKalb, IL 60115-2897 Phone: (815) 753-7882 Fax: (815) 753-0504

February, 2010

The views expressed here are those of the individual authors alone and do not necessarily reflect those of the Office of the Comptroller of the Currency or the Department of the Treasury.

*

Electronic copy available at: http://ssrn.com/abstract=1567665

Moody's and S&P Ratings: Are They Equivalent? Conservative Ratings and Split Rated Bond Yields Abstract
We examine the relative impact of Moody’s and S&P ratings on bond yields and find that at issuance yields on split rated bonds with superior Moody’s ratings are, on average, 8 basis points lower than yields on split rated bonds with superior S&P ratings. This pattern suggests that investors differentiate between the two ratings and assign more weight to the ratings from Moody’s, the more conservative rating agency. Moody's ratings become relatively more conservative after 1998 and the impact of a superior Moody's rating upon split rated bond yields is stronger. In addition, the differential impact of the two ratings on split rated bond yields is more pronounced for Rule 144A issues, which are more opaque.

Electronic copy available at: http://ssrn.com/abstract=1567665

Moody's and S&P Ratings: Are They Equivalent? Conservative Ratings and Split Rated Bond Yields
I. Introduction Most publicly issued corporate bonds in the US receive ratings from two major rating agencies, Moody’s and Standard & Poor’s (S&P). About 50% of the time, the Moody's and the S&P ratings are different at the notch level, resulting in so-called split ratings, with Moody's more likely to have the conservative (lower) rating (Morgan, 2002, Van Roy, 2005).1 We show that about 56% of split rated bonds have conservative Moody’s ratings and investors differentiate between these two ratings, especially during the period 1998-2008. When Moody's has the superior (higher) rating, bond yields are approximately 8 basis points lower than when S&P has the superior rating. Thus investors appear to hold Moody’s reputation in higher regard than S&P’s. Split ratings and the differential impact of Moody's versus S&P are important for two reasons. First, while virtually all public issues of bonds receive ratings from both rating agencies, financial regulators generally do not differentiate between these ratings.2 Most rating-based regulations require only one rating without specifying a particular rating agency (Cantor and Packer, 1995, BIS, 2000). If the bond issue has multiple ratings, then either the highest or the second highest rating is usually used regardless of which rating agency assigns the highest or second highest rating (Cantor and Packer, 1995).3 In addition, under the Basel II framework,

See also Ederington (1986), Pottier and Sommer (1999), and Livingston et al. (2007). For a rating to be acceptable to regulators, the rating agency must be designated by the SEC as a ‘nationally recognized statistical rating organization,’ or NRSRO. Moody’s and S&P are both NRSROs. 3 A notable exception to this general rule is that of the National Association of Insurance Commissioners (NAIC). In the case of split ratings, the NAIC can choose either the superior or inferior rating based on its own analysis (Cantor and Packer, 1996).
2

1

1

banks can choose to use either one or more rating agencies to risk-weight their credit exposures. If a bank chooses to use one rating agency, it makes no difference whether it is Moody’s or S&P. If two rating agencies are used, the inferior of the two ratings determines the risk weights, regardless of which agency assigns the inferior rating (Van Roy, 2005). Second, many academic studies treat these ratings as interchangeable in spite of the fact that Moody's and S&P ratings frequently disagree. Some studies use Moody’s ratings as a proxy for default risk (for example, Kidwell et al., 1984) while others use S&P ratings (for example, Avramov et al., 2007). A few studies take advantage of both Moody’s and S&P ratings, but use the average of the two when they differ without regard to which rating is superior (for example, Fenn, 2000). Another common practice is to use the Moody’s (S&P) rating when it is available and supplement with the S&P (Moody’s) rating when the Moody’s (S&P) rating is not available, implicitly assuming that these two ratings are equivalent and interchangeable (for example, Yu, 2005, Butler, 2008). This study uses a sample of 6,652 newly issued, split rated, non-financial US corporate bonds from 1983 to 2008 to examine the relative impact of the two ratings on bond yields. By focusing on split rated bonds, our analysis highlights the differences between Moody's and S&P ratings. First, we confirm findings in earlier studies that Moody’s is more likely to give a conservative (or inferior) rating than S&P when these two differ. Second, when Moody's has the superior rating, investors require lower yields, about 8 basis points on average, for split rated bonds.4 Bond investors appear to differentiate between these two ratings and assign greater

4

The 8 basis points yield difference is statistically significant. While the sample size is very large, the statistical significance is not just driven by the sample size. In a subsample of 1,291 Rule 144A bond issue, the yield difference is also significant at the 1% level. In addition, we estimate the yield difference for each of the 33 split rating categories. The yield differences are significant at the 1% or 5% level in 10 categories. The sample size for these rating categories ranges from 26 to 643, indicating that the statistical significance is not a result of large sample size.

2

they do not distinguish between splits with superior Moody’s ratings and splits with superior S&P ratings.5 This evidence suggests that bond investors. In addition. are sufficiently sophisticated to detect evolving differences between the two major rating agencies and act accordingly. our findings do not contradict those of Blume et al. We find that the yield premium is different in these two cases. Thus. information about them tends to be more opaque.652 split rated bonds to the yields for a sample of 7. The main findings of the paper are summarized in Figure 1.201 non-split rated bonds. Moody’s ratings are relatively comparable to S&P ratings prior to 1998. However. (1998) find that S&P tightens rating standards and its ratings become more stringent from 1978 to 1995. mostly institutional investors. but significantly larger (about 13 basis points) between 1998 and 2008. the Blume et al. 5 3 . (1998). while we find Moody’s becomes more conservative (relative to S&P) after 1998. which illustrates the yield premiums assigned to split rated bonds over non-split rated bonds. study covers a time period from 1978 to 1995. the yield difference between bonds with a superior Moody’s rating and bonds with a superior S&P rating is minimal prior to 1998. the study does not compare S&P ratings with Moody’s ratings. the differential impact of the two ratings on bond yields is more pronounced for Rule 144A bond issues. However. When Moody’s (S&P) assigns the superior rating. Furthermore. the yield premium is much smaller (larger). Bond investors appear to be particularly concerned about the information opaqueness of Rule 144A bond issues and therefore rely more heavily on the ratings from the conservative rating agency in their assessment of default risk. As Rule 144A issues are not registered with the SEC and have lower standards for disclosure. but become more conservative than S&P thereafter. Accordingly. When no distinction is made Blume et al.weight to the ratings from the more conservative agency. Livingston and Zhou (2010) find that split rated bonds average a 7-basis-point yield premium over non-split rated bonds of similar credit risk and they attribute this yield premium to information opacity of split rated bonds. Third. Furthermore. we also compare the yields for the sample of 6.

42 million in price. Italy and Japan) have ongoing monitoring of the recognized rating agencies (BIS. The difference in the yield premium. indicates that yields on split rated bonds with superior Moody’s ratings are. Although regulatory agencies in many countries set criteria for eligible credit rating agencies for regulatory purposes. we estimate that the average yield spread difference between two adjacent notch rating categories is about 30 basis points. the yield premium is only 2 basis points. 8 basis points lower than those with superior S&P ratings. once a rating agency is recognized as an NRSRO by the SEC. equivalent to a difference of half a notch rating or $2. split rated bond issues have an average yield premium of approximately 6. While we do not advocate using one rating agency versus the other. for a typical split rated bond in our sample. 6 4 . In the US. When Moody's has the superior rating. the 8-basis-point difference in yield spread translates to a difference of $1. Thus. the yield premium is 10 basis points if S&P has the superior rating. Furthermore. First.between splits with superior Moody's ratings and splits with superior S&P ratings. In order to put the 8-basis-point yield spread difference into perspective. on average. 2000).6 This study has two important implications. regulators should continuously monitor the performance of each rating agency. Conversely. it calls into question the common practice by financial regulators and by academic studies to treat the two major ratings equally. only three countries (France.5 basis points above the average of yields for non-split superior rated and non-split inferior rated bonds. there is no monitoring of the performance of the rating agency and no formal mechanism to strip its For the 1998-2008 subsample period. similar to findings in Livingston and Zhou (2010). the yield spread difference is about 13 basis points.3 million in price difference for a typical split rated bond. a yield difference of 8 basis points is approximately equivalent to a difference of one fourth of a notch rating. 8 basis points.

Thus. The remainder of the paper is organized as follows. the findings in this paper suggest that bond investors are quite sophisticated and differentiate between the two major rating agencies. the SEC should not only be the gate-keeper of the NRSRO status. This finding supports the argument that rating agencies have strong incentives to issue honest and accurate ratings to protect their reputation capital (Smith and Walter. Such concerns for reputation capital can offset or mitigate the potential conflicts of interest when rating agencies are paid by issuing firms. If one rating agency consistently becomes more lenient (conservative) over time. Section II summarizes the previous literature. but should also be the ‘rater of the raters. after being designated as an NRSRO. Covitz and Harrison. To increase the competition in the rating industry. ‘sell’ their SEC-sanctioned ratings to maximize current profits. bond investors will gradually adapt to such changes by putting less (more) weight on that agency’s rating in their assessment of default risk. 7 The SEC website lists the ten NRSROs (http://www.’ Second. Our findings also highlight the importance for rating agencies to protect their reputational capital.NRSRO status. Conceivably. some rating agencies might. and Section III describes the data and provides summary statistics.gov/answers/nrsro. 2004). Section IV analyzes the differential impacts of Moody's and S&P ratings upon yields of split rated bonds.sec. the SEC has significantly increased the number of NRSROs from three in 1975 to currently ten.7 The paper’s findings on the evolving relative conservativeness of different rating agencies suggest that rating agencies may not consistently maintain the quality of their ratings. 5 . Section V compares yields of split rated and non-split rated bonds. Section VI concludes the paper.htm). 2002.

however.II. either agency might assign a different rating.M. Moody’s and S&P. in a study of financial strength ratings of property liability insurance companies by A. on another day or with a slightly different set of analysts. Moon and Stotsky (1993) find that the two rating agencies use different economic variables to determine ratings on municipal bonds. a bond rated A+ by Moody’s and A by S&P should have the same yield as another bond rated A by Moody’s and A+ by S&P.e. implying that differences in the two ratings are merely random errors.. Ederington (1986) examines determinants of the two ratings for US corporate bonds from 1975 to 1980. In addition. Moon and Stotsky (1993) use outstanding municipal bonds in their study. An implication of the rating equivalence hypothesis is that yields on split rated bonds should be the same regardless of which rating agency assigns a superior rating. Observed split ratings for outstanding bond issues might be caused by asynchronous changes in ratings over time rather than by systematic difference between the two rating agencies. Background and Literature Review Given the dominance of the two major rating agencies. According to Ederington. Pottier and Sommers (1999) find that the three rating agencies use different factors in modeling an insurer’s Note that these results should be treated with caution. In addition. His study finds that the two rating agencies use a common set of factors such as firm size and leverage ratio to estimate credit risk. Best. In other words. i.” We call this view the rating equivalence hypothesis. “the respective positions of the two agencies could easily have been reversed. Ederington’s (1986) findings suggest that the two ratings are basically equivalent. and they assign similar weights to these factors. 8 6 . Other studies. there is no systematic difference in the rating scales used by the two major rating agencies. suggest that there are systematic differences between the two rating agencies. they find that the rating scales of the two agencies differ systematically. Thus. several studies compare Moody’s and S&P ratings.8 Similarly.

Recent studies on split ratings also indicate that there might be systematic differences between the two rating agencies. He further argues that split ratings are likely to be lopsided. while investors do not see a difference. the more conservative rating agency (or the agency that worries more about over-rating than under-rating) tends to assign an inferior rating. a survey study by Baker and Mansi (2002) investigates the attitude of issuing firms and investors toward the rating agencies. Morgan's idea is that the two rating agencies may not worry equally about over-rating. This finding is not a surprise since S&P tends to assign superior ratings compared to Moody’s. suggesting that different ratings convey different information and may not be equivalent. (2007) and Pottier and Sommers (1999) report similar patterns for corporate bond ratings and financial The survey asks the following question: “How would you rank the following rating agencies in terms of how closely their ratings of corporate bonds compare to where these bonds actually trade?” It only asks investors this question. Güttler and Wahrenburg (2007) find that Moody’s updates its ratings to reflect changing default risk in a timelier manner than S&P. Livingston et al. Indeed. On the other hand. 9 7 . When severe asset opacity problems exist. split ratings should be symmetric if split ratings are merely random errors. Morgan (2002) suggests that split ratings are caused by asset opacity of issuing firms. one rating agency will be more likely to assign a superior rating than the other. In addition to the empirical comparison of the two rating agencies. that is.financial strength. On the other hand. if asset opacity is the cause of the split rating.9 This study suggests that both investors and issuing firms perceive these two ratings differently. The study reports that issuing firms believe S&P ratings are more accurate than Moody’s. Morgan (2002) finds that Moody’s ratings for banking firms are more likely to be inferior compared to S&P ratings when the two differ. investors believe that corporate bond prices more closely follow Moody’s rating than S&P rating. Consistent with Baker and Mansi’s (2002) survey results.

8 . Regardless of the underlying cause. 2) different weights assigned to risk factors. None of the studies. Reiter and Ziebart... and 2) bond investors differentiate between these two ratings. 3) relative costs of over-rating vs. These findings suggest that Moody’s is more conservative and less likely to over-rate a bond issue. Livingston and Zhou (2010) find that split rated bonds average a 7-basis-point yield premium over non-split rated bonds of similar credit risk. however. 1987. 10 Note that the systematic difference between the two rating agencies might be caused by 1) different rating scales. that is. Again. more likely to assign inferior ratings than the other. Thus. 1991). 1985. 1997. An empirical study of rating accuracy by Güttler (2005) supports this view. Liu and Moore. Some studies find that inferior ratings determine yields on split rated bonds (Billingsley et al. 1988.10 An implication of the systematic difference hypothesis is that split rated bonds with superior ratings from the more conservative rating agency should have lower yields if bond investors differentiate between these two ratings. Perry et al. systematic difference hypothesis suggests that one rating agency will be more conservative. More recent studies find that both the superior and inferior ratings have an impact on yields (Cantor et al. we perform a joint test that 1) there is a systematic difference between the Moody’s and S&P ratings. The study finds that Moody’s ratings are slightly better at predicting default than S&P ratings. these studies do not test whether a superior rating from one particular rating agency has a different impact on yields than a superior rating from another rating agency. others find that the superior ratings set bond yields (Hsueh and Kidwell. in examining the yields on split rated bonds. 1998). 1988). This study is also linked to another line of research on the impact of split ratings on bond yields. under-rating. In addition.. Jewell and Livingston.strength ratings of insurance companies respectively. We call this view the systematic difference hypothesis. distinguish split rated bonds with superior Moody’s ratings from those with superior S&P ratings.

non-financial public and Rule 144A corporate bond issues from the Thomson Financial SDC database.13 Perpetual bonds. Inclusion of these issues in our sample does not.III. This suggests that high quality firms are more likely to issue longer term bonds.12 Thus. We start in 1983 because Moody’s began issuing notch ratings after April 1982. 14 We exclude these issues as a data quality filter. 1986. US domestic.by at least one rating agency. Non-split rated bonds have average maturity similar to split rated bonds but slightly smaller issue size. Data Collection and Description We collect data on fixed rated. All split rated bonds in the sample have Moody’s and S&P ratings that differ by one or two notches. We also exclude several issues that are rated CCC.rating are able to access the public bond market.14 The final sample consists of 13. slightly lower than that of the split rated sample.853 bond issues comprising 7. and putable bonds are excluded. however. 1998).16 The non-split rated sample has an average original yield to maturity (YTM) of 7.15 Table 1 describes the sample. 13 S&P started to issue notch ratings in 1974 (Cantor and Packer. 9 . To make yields comparable between bonds of different maturities. We use the data on original bond issues for two reasons.86%. It is highly unlikely that firms with a CCC.201 non-split rated issues and 6.4 years. Ederington and Goh.652 split rated issues. split ratings on outstanding bonds may merely be the result of slow updating by one agency instead of a systematic difference between the two ratings. The sample period covers 1983 to 2008. 15 We exclude issues with three or more notches of split ratings because there are very few observations in each of these distinct rating combination categories.9 years while below-investment grade bonds have an average maturity of 9. 1995). split ratings on existing bond issues can be caused by asynchronous changes in ratings by the two rating agencies in response to changes in underlying default risk. in addition to letter ratings. we subtract the yield for Treasury 11 Some research has found that rating agencies tend to lag financial markets in reflecting new information (Holthausen and Leftwich. bond ratings on new issues reflect the most up-to-date information about the issuers. 12 Güttler and Wahrenburg (2007) document a lead-lag relation between the ratings of Moody’s and S&P. First. change our results. bonds with credit enhancements. 16 Investment grade bonds have an average maturity of 13.11 Second.

Specifically. we create two numerical rating variables: Moody’s Rating and S&P Rating. Moody’s Rating is. These findings suggest that Moody’s is more conservative than S&P.5% of the split rated issues in our sample (3. consistent with Morgan (2002) and Livingston et al. higher than the Average Rating for split rated bonds. The split rated sample has an average Moody’s Rating of 9. The Average Rating is the average of Moody’s and S&P Ratings. The average Treasury Spread is slightly lower for the non-split rated sample. (2007). meaning that Moody's gives an inferior (lower) average rating. The Average Rating for non-split rated bonds is 10. or Moody’s Rating minus S&P Rating. on average. To summarize the credit quality of the sample. 10 . we also calculate the Rating Difference.87. Empirical Analysis of Split Rating Sample In this section. but there is no difference between the superior S&P rating subsample and the superior Moody’s rating subsample.5% of the issues (2. This is consistent with findings in Livingston et al.14 notches below the S&P Rating when the two ratings differ. 0.961) have superior Moody’s ratings. slightly above BBB. For each bond issue.33. IV.691) have superior S&P ratings and 44. (2007). we examine the yields on split rated bond issues.14. lower than the average S&P Rating of 10. In addition. The average Rating Difference of the split rated sample is -0.01.securities of similar maturity from the yield to maturity of each bond to calculate the Treasury Spread. In other words. 55. statistically significant at the 1% level. Both variables range from 1 (for CCC) to 18 (for AAA). we compare yields on split rated bonds with superior Moody’s ratings to the yields on split rated bonds with superior S&P ratings.

we create 33 distinct rating categories. ranging from AAA/AA+ to CCC+/CCC. In 25 out of the 33 rating categories.1. This section examines whether this pattern holds true for bonds of different credit quality. 11 . Interestingly. This difference has little impact on investment grade bonds. we distinguish between those with superior Moody’s ratings and those with superior S&P ratings. the 17 Moody’s and S&P use slightly different rating notation but they are generally thought to be equivalent. In 20 out of the 33 rating categories. Figure 2 depicts the number of split rated bonds with superior Moody’s ratings and the number of splits with superior S&P ratings in each rating category.17 For each rating category. 2000). This pattern might be explained by the fact that the Moody’s rating incorporates both the probability of default and the expected recovery rate. S&P’s BBB+ corresponds to Moody’s Baa1. Following other studies. First. for the 8 rating categories with more issues of superior Moody’s ratings. more likely to assign a more conservative rating than S&P. consistent with our earlier finding that the Average Rating for issues with superior Moody’s ratings is slightly lower. Figure 2 and the summary statistics confirm the findings in previous studies that Moody’s is more likely to give conservative ratings than S&P when these two differ. 5 are below-investment grade. as well as two sub-samples: those with superior Moody’s ratings and those with superior S&P ratings. based on the combination of the two ratings. Univariate Analysis The summary statistics suggest that Moody’s is. we use the S&P rating notation in this paper. there are more issues with superior S&P ratings than issues with superior Moody’s ratings. while the S&P rating is strictly a measure of default risk (BIS. Table 2 reports the average treasury spread for each rating category of the split rated sample. on average. but might create systematic differences between the two ratings for below-investment grade bonds. For example. The next logical question is whether this conservative tendency in Moody’s rating is recognized by bond investors and reflected in lower bond yields.

14 basis points. Only in three rating categories do superior Moody’s rating subsamples have significantly higher treasury spreads. 2.superior Moody’s rating sub-samples have lower treasury spreads than the superior S&P rating sub-samples. in the A+/A split rating category. If bond investors require lower yields for issues with a superior Moody’s rating. the coefficient on SUPMOODY should be significantly negative. SUPMOODY. a. an 11-basis-point difference with high statistical significance.78 basis points. Multivariate Analysis This section examines yields on split rated bonds using multivariate regressions. Control Variables 12 . The explanatory variables include rating dummy variables and control variables. Moody’s rated A) average a treasury spread of 94. while bonds with superior Moody’s ratings (S&P rated A. the yield to maturity minus Treasury yield). For example. The test variable is a dummy variable. These findings indicate that bond investors differentiate between these two bond rating agencies and require lower yields when Moody’s assigns a superior rating. the base case is split rated bonds with a superior S&P rating. Thus. set equal to one for issues with a superior Moody’s rating and zero otherwise. The dependent variable is the Treasury Spread (that is. and the differences are significant in 9 rating categories. bonds with superior S&P ratings (S&P rated A+. Moody’s rated A+) average a treasury spread of 82.

(2005) finds a liquidity premium on corporate bonds. We also include SHELF dummy and R144A dummy variables to control for different methods of bond registration. PROCEEDS. Fenn (2000) shows that issue size and maturity have an impact on bond yield. SHELF equals one for shelf registered issues and zero otherwise. Kidwell et al. To control for differences in bond features. and UTILITY dummy variables in the regression models. Large issues of bonds are usually more liquid than small issues and consequently investors may require lower rates of return for large issues of bonds. We expect the coefficient for this variable to be positive because callable bonds are riskier for investors. SENIOR dummy.. the coefficient for the SENIOR dummy is anticipated to be negative. controls for registration types. MATURITY is the natural log of years to maturity. we also run the regression models without the MATURITY variable.18 Thus. and controls for market conditions. we include the MATURITY.Previous studies have shown that many factors other than default risk can have an impact on treasury spreads. R144A equals one for Rule 144A issues and zero otherwise. 1987) show that shelf-registered bonds have lower yields. The UTILITY dummy equals one if the issuer is a utility firm and zero otherwise. three sets of control variables are included in addition to the bond ratings: controls for different bond features. The CALL dummy variable is set equal to one if the bond is callable and zero otherwise. 18 13 . CALL dummy.19 PROCEEDS is the total dollar proceeds of the bond issue. Different specifications of the variable do not affect the results either. we expect the coefficient for PROCEEDS to be negative. Chaplinsky and Ramchand. we expect the coefficient for the SHELF For example. 2004). Thus. The results do not change materially. 1987) document lower yields for shelfregistered bond issues. (1984. 19 As a robustness check. Houweling et al. and zero otherwise. A SENIOR dummy is set equal to one if the issue is senior debt. Kidwell et al. Hence. Kidwell et al. Since senior debt is less risky than subordinated debt. 1984. (1984. Previous studies find that yield spreads vary with bond maturity (for example.

we distinguish one-notch splits and two-notch splits by creating two test dummy variables: SUPMOODY1 and SUPMOODY2. The RISKPREM is defined as the difference between the Moody’s AAA Corporate Bond Index Yields (obtained from the Federal Reserve website) and yields for 10-year Treasury securities. Chaplinsky and Ramchand. Fridson and Garman (1997) and Fenn (2000) have similar findings.38 and significant. SUPMOODY1 (SUPMOODY2) equals one for one-notch (two-notch) split rated bonds that have a superior Moody’s rating and zero 20 Multiple bond issues by the same issuing firm may create a clustering problem (Wooldridge. The coefficient on SUPMOODY is -8. indicating that yields on bonds with a superior Moody’s rating average about 8 basis points lower than yields on bonds with a superior S&P rating.dummy to be negative..20 The coefficients on most control variables have the expected signs with the exception of the SENIOR dummy variable. 21 The significantly positive coefficient for the SENIOR dummy variable indicates that senior bonds have higher yields. We use the Cluster option in STATA to adjust for the potential clustering problem and report the cluster-robust p-values. 2004). 2010). Finally. a counter intuitive result that may be caused by a tendency for rating firms to give senior bonds unjustified higher ratings (John et al. Thus. 14 . we include this dummy as a control variable. Other variables to control for market conditions are a series of zero/one year dummy variables with 2008 as the base case. Model 1 uses the sample of split rated bonds to study whether splits with a superior Moody’s rating have a lower treasury spread than splits with a superior S&P rating. b.21 In Model 2. 2003). since the bond default risk premium fluctuates with overall market conditions. 2002. a RISKPREM variable is included in the regression to control for changes in the market default risk premium. The coefficient for this variable is expected to be positive. Studies on Rule 144A issues find higher yields on Rule 144A issues than non-Rule 144A issues (see Livingston and Zhou. Main Regression Results In Table 3. 2002.

The coefficient on SUPMOODY1 notch is -7. the Model 1 regression is run for each split rating category without the rating dummy variables. to check if the results are driven by only a few credit rating categories. 694 are two-notch splits and 1. while the coefficient on SUPMOODY_Letter is significant at the 1% level. bond investors are likely to be concerned about the accuracy of ratings and more worried about over-rating.75. Finally. both of them are statistically significant. we expect that a superior Moody’s rating may lower yields more when the two ratings differ at the letter level than at the notch level. SUPMOODY_Notch (SUPMOODY_Letter) equals one for notch (letter) split rated bonds that have a superior Moody’s rating and zero otherwise. -13. In addition. is much larger in magnitude than the -5.115 are one-notch splits. the coefficient on SUPMOODY_Notch is only marginally significant.otherwise. There are 2. The coefficient on SUPMOODY_Letter. With greater information opacity and uncertainty.23 Rating splits at the letter level may indicate greater uncertainty and investors may be more worried about rating accuracy. If Moody’s is recognized by investors as a more conservative rating agency.579) are one-notch splits and 16. 15 .073) are two-notch splits. The coefficient is negative in 26 out 22 23 Among the split rated sample. Among the 4. Table 4 reports the coefficient on SUPMOODY for each regression.494 notch split rated issues. superior Moody’s ratings will lower yields for two-notch split rated bonds more than for one-notch split rated bonds.464 are one-notch splits.158 letter split rated issues.64 while the coefficient on SUPMOODY2 is -12.22 Livingston and Zhou (2010) find that multiple-notch split ratings are stronger signals of information opacity and bond investors require higher yield premiums on multiple splits than on one-notch splits. The empirical results confirm this conjecture.89 coefficient on SUPMOODY_Notch. 83.87% (5.60. Model 3 distinguishes between notch split rated bonds and letter split rated bonds by creating two other test dummy variables: SUPMOODY_Notch and SUPMOODY_Letter. Among them. 379 are two notch splits and 4. As a result.13% (1.

26 For the earlier period. 6 of the 10 significant rating categories are letter split ratings. 26 We choose 1998 as the cutoff year so that the two sub-samples have roughly the same number of observations. Furthermore. the percentage of issues with conservative (lower) Moody’s ratings increases to 61. significantly lower than the average S&P Rating of 9.458 and 10. On the other hand. we do not report regression results for control variables. the Moody’s ratings are not systematically higher or lower than the S&P ratings in the earlier period.25 These findings indicate that investors consistently require lower yields for bonds with superior Moody’s ratings. On the other hand.6% of issues have conservative (lower) Moody’s ratings. the average Moody’s Rating and S&P Rating are virtually the same: 10. This suggests that the statistical significance for the main results in Table 3 is not just driven by the large sample size. c.of the 33 rating categories and is significant at the 1% or 5% level in 10 categories. 16 . consistent with the earlier finding that a superior Moody’s rating causes a larger reduction in yields for letter splits. the average Moody’s Rating is 9.275. It is very plausible that the relative conservative tendencies of the two rating agencies may evolve during such a long time period.4%. This section investigates the changing relative rating conservativeness and its impact on bond yields. Thus. 49. 25 To save space. We have also broken the sample into two 13-year periods by using 1996 as the cutoff year and the results are qualitatively the same. 24 6 of the 10 rating categories with significant coefficients on SUPMOODY have fewer than 100 observations.463 respectively. but become more conservative in the late 1990s and 2000s. We first break the split rated sample into two time period sub-samples: 1983-1997 and 1998-2008.24 In addition.551. In addition. Evolution of Conservative Ratings and its Impact on Treasury Spread Our sample period spans 26 years. for the latter period. the coefficient is positive and marginally significant in only one rating category (BB+/BB). Results are available upon request.

we do not report the complete regression results. Thus. In addition to the sub-sample analysis. the coefficient on SUPMOODY becomes positive (3.If bond investors are cognizant of the evolving relative conservativeness of the two rating agencies. suggesting that our main results are largely driven by the latter sample period. If one rating agency consistently becomes more lenient (conservative) over time. the coefficient is negative and significant at the 1% or 5% level in only 2 years (1992 and 1995). these findings also highlight the importance for the rating agencies to protect their reputational capital. With the interaction term in the regression.83 and significant at the 1% level. The coefficient on the interaction term is -0. 28 27 17 . we run the main regression (Model 1) for each of the two time period sub-samples and report the results in the first two columns of Table 5. We also run separate regressions for each year and the results are consistent with the main findings. the magnitude of the coefficients is larger in more recent years than in earlier years. The coefficient on SUPMOODY is -4. where Moody’s is significantly more conservative than S&P.57 and only marginally significant for the 1983-1997 sub-sample. In addition. the coefficient on SUPMOODY is -13. the earlier (latter) period should exhibit smaller (greater) yield differences between issues with superior and inferior Moody’s ratings. For the 11 years in the latter period.28 The preceding results suggest that bond investors are sophisticated and can detect subtle differences between the two major rating agencies and act accordingly. we also run the main regression on the full split rated sample with an interaction term between the SUPMOODY and a Time Trend variable. bond investors will For the sake of brevity.37 and highly significant for the 1998-2008 sub-sample. For the 15 years prior to 1998. but they are available upon request. which is defined as issue year minus 1982.94) though not significant. To check this hypothesis.27 This finding indicates that bond investors gradually differentiate between the two rating agencies as one agency becomes more conservative than the other over time. On the other hand. the coefficient is significantly (at the 1% or 5% level) negative in 5 years.

or Qualified Institutional Buyers (QIB). 18 . The regression results are reported in the last two columns of Table 5. as a result. Indeed. However. In addition. To check this hypothesis. information opacity problems may also decrease the accuracy of bond ratings on Rule 144A issues and.31 We break the sample into Rule 144A and non-Rule 144A issue subsamples and estimate the main regression (Model 1) for the two subsamples separately. Moody’s is much more conservative than S&P and the impact of rating conservativeness on bond yields is more significant. Conservative Ratings and Rule 144A An interesting development in the US bond market since the early 1990s is the significant growth of Rule 144A issues.29 Due to the lack of registration and lower standards for disclosure. firms with information asymmetry problems may prefer to issue in the Rule 144A market. Livingston and Zhou (2002) report that over half of Rule 144A bonds in their sample are issued by firms accessing the bond market for the first time and almost a quarter of the issuing firms do not file periodic disclosures with the SEC. Lack of disclosure or lower quality of disclosure may lead to information opacity problems. as documented in the previous section. 29 30 See Fenn (2000) and Livingston and Zhou (2002) for more details about Rule 144A issues. we utilize the 1998-2008 subsample of split rated bonds. Rule 144A issues are not registered with the SEC but can be traded among large institutional investors.30 Indeed. a period where. 31 Rule 144A was first adopted in 1990 and the market grew significantly in the late 1990s. the coefficient on SUPMOODY is -22.81. We have also used the full sample of split rated bonds to examine this issue and the results are similar.gradually adapt to such changes by putting less (more) weight on that agency’s rating in their assessment of default risk. Alternatively. most Rule 144A issues in our sample are from the 1998-2008 sub-sample. Thus. d. Hence. bond investors will tend to be more concerned about over-rating if the two major ratings split. using the full sample introduces bias because most Rule 144A bonds are issued in the latter time period. For Rule 144A issues. there may be greater information opacity problems for Rule 144A bond issues. we expect that more conservative ratings will have a greater impact on yields of split rated Rule 144A issues. bond investors are forced to rely more heavily on bond ratings to assess the default risk of Rule 144A issues.

Second. a yield difference of 8 (13) basis points translates to a price difference of 0. We take two approaches to gauge the economic significance.6% (0.98%). 19 . This evidence suggests that bond investors are particularly concerned about rating accuracy on bond issues with severe information opacity problems and place greater trust in the ratings from the conservative rating agency.much larger in magnitude than its counterpart for the non-Rule 144A bonds. this section estimates the economic significance of the yield difference. First. Thus. or $1.42 ($2. that the average yield difference between two adjacent notch rating categories is about 30 basis points. Thus. in Section V.6 years and yield to maturity of 8.02. a yield difference of 8 (13) basis points is approximately equivalent to a difference of 1/4 (1/2) of a notch rating.5. The modified duration for the average bond is approximately 7. we compare the 8-basis-point (13-basis-point) yield difference for the whole sample (the 1998-2008 subsample) to the average yield difference between two adjacent notch rating categories. Table 1 reports that the average size of split rated bonds in our sample is $235 million. we estimate how much the bond price will differ due to the 8-basis-point (13-basis-point) yield difference for a typical split rated bond in our sample. with an average maturity of 12. We estimate.18%.30) million. Economic Significance While the previous sections find the yield difference between bonds with superior Moody’s and superior S&P ratings statistically significant. e. -7.

However. called the superior rating model. allowing a measure of the impact of split ratings on treasury spreads. Livingston and Zhou (2010) document a 7-basis-point yield premium on split rated bonds over non-split rated bonds of similar credit quality and they attribute the yield premium to the information opacity of split rated bonds. Each model is run with both split rated and non-split rated bonds. they do not distinguish between those with superior Moody’s ratings and those with superior S&P ratings. The methodology is described in detail in Appendix A. Using the methodology of Livingston and Zhou (2010). Thus. the superior of the two ratings is used to construct the rating dummy variables. treasury spreads (for the full sample of non-split rated bonds and split rated bonds) are regressed against rating dummy variables. and a split rating dummy variable. the split rating dummy variable reflects the fact that a split rated bond has an inferior second rating not captured by the rating dummy variables. control variables.V. In the first model. This methodology uses two treasury spread regression models to estimate the information opacity premium. The coefficient on the split rating dummy variable can be interpreted as 20 . A follow up question is how the yields on these two different types of split rated bonds compare to non-split rated bonds. Conservative Ratings and Information Opacity Premiums The previous section compares the yields on split rated bonds with superior Moody’s ratings to those with superior S&P ratings. For split rated bonds. we estimate the information opacity premiums for split rated bonds with superior Moody's ratings and for split rated bonds with superior S&P ratings. Our findings of lower yields on splits with superior Moody’s ratings suggest that the information opacity premium varies between splits with superior Moody’s ratings and splits with superior S&P ratings.

while ours extends to the end of 2008.32 The coefficients on the split rating dummy variable from the superior and inferior rating models are 24. This is very similar to the 7-basis-point premium reported in Livingston and Zhou (2010). The 32 Our sample is slightly different from that of Livingston and Zhou (2010) for two reasons.the difference between the actual treasury spreads of split rated bonds and the estimated treasury spreads of these bonds if both rating agencies had assigned the same superior rating. Second. Thus. the split rating dummy variable reflects the fact that a split rated bond has a superior second rating compared to the non-split rated bonds. their sample covers 1983 to September 2008. the yields of split rated bonds with superior Moody’s ratings are compared with yields of nonsplit rated bonds. First. we exclude splits with superior S&P ratings. The process is reversed in the second regression model. The coefficient on the split rating dummy variable can be interpreted as the difference between the actual treasury spreads of split rated bonds and the estimated treasury spreads if both rating agencies had assigned the same inferior rating. the difference of the absolute values of the coefficients on the split rating dummy for the superior rating model and the inferior rating model is divided by two to arrive at the information opacity premium. suggesting an information opacity premium of 6. We first replicate Livingston and Zhou’s (2010) main findings on our whole sample (of both split rated bonds and non-split rate bonds) in Table 6.80 and -11. Next. the treasury spread is regressed against rating dummy variables. The logic of this is explained in the Appendix. and a split rating dummy variable. our sample excludes bonds with three or more notches of split ratings.5 basis points (that is.76 respectively. the inferior of the two ratings is used.80-11. and the results are reported in the first two columns of Table 7. For the full sample of non-split rated and split rated bonds. we distinguish the cases of split rated bonds with superior Moody’s and superior S&P ratings. 21 . Thus. Finally. For split rated bonds. In the first set of regressions. control variables. called the inferior rating model. [24.76]/2).

This evidence indicates that the information opacity premium is significantly smaller when Moody’s assigns a superior rating (2 basis points). and higher (10 basis points) when S&P assigns the superior rating. the coefficients on AA.5]/2).34 and -8. For each rating category.34-8. [20. we exclude splits with superior Moody’s rating and compare the yields of split rated bonds with superior S&P ratings and yields of non-split rated bonds in the second set of regressions.01-16. Based on the regression results in Table 7.50 coefficients from the superior and inferior rating models imply an information opacity premium of 10 basis points (that is.and A+ are -63. indicating an information opacity premium of 2 basis points (that is.coefficients on the split rating dummy variables from the superior and inferior rating models are 20. The results are reported in the last two columns of Table 7. we obtain similar estimates. For example.98 respectively. which is in line with the estimated average yield difference between the two groups as reported in Section IV. from the first column of Table 7.22]/2). Then. The difference in the information opacity premium between the two groups of split rated bonds is 8 basis points. about 16 basis points.79 and -51. For below investment grade rating categories.01 and -16. [28. the average yield difference is 67 basis points but they only account for 25% of the sample. we also estimate the average difference in yield spreads between two adjacent notch rating categories. 34 Using the coefficients reported in the other three columns of Table 7.33 The weighted average yield spread difference between all the adjacent rating categories is about 30 basis points.34 33 A simple average is biased because the yield spread difference between below investment grade rating categories are much larger but there are fewer observations.22 respectively. See Figure 1. we weight the absolute yield spread difference by the number of observations in the rating category. For investment grade rating categories. The 28. 22 . the average yield difference is much smaller. suggesting a 12 basis points difference in the yield spreads between the two adjacent rating categories. we find the absolute yield spread difference from its adjacent higher rating category. Then.

suggesting that investors differentiate between these two situations. but evolving. the relative conservativeness of the two rating agencies is not static. If one rating agency consistently becomes more lenient (conservative) over time. The yield difference is both statistically and economically significant. Accordingly. This evidence indicates that bond investors are particularly concerned about opaque bond issues and rely more heavily on the ratings from the conservative rating agency in their assessment of default risk.rating from S&P is thought to be the same as another bond with an A+ from S&P and an A. This 23 . In other words. This wide perception of equivalence of the two major ratings is particularly troublesome when previous studies have consistently shown that Moody’s is a more conservative rating agency and is more likely to assign a conservative rating than S&P when the two differ. This study performs a joint test that 1) there is a systematic difference between the Moody’s and S&P ratings and 2) bond investors differentiate between these two ratings. Discussion and Conclusion While most public corporate bond issues have ratings from both Moody’s and S&P. We find that split rated bonds with superior Moody’s ratings have lower yields than similar bonds with superior S&P ratings.VI. the differential impact of the two ratings on bond yields is more pronounced for Rule 144A bond issues. bond investors differentiate between the two rating agencies only when there is a systematic difference between them. which have greater information opaqueness problems. Furthermore. regulators and many academic studies do not differentiate between the two ratings and treat them as equivalent and interchangeable.from Moody's. This evidence highlights the importance for the rating agencies to protect their reputational capital. a bond with an A+ rating from Moody's and an A. bond investors will gradually adapt to such changes by putting less (more) weight on that agency’s rating in their assessment of default risk. In addition.

In addition. the finding suggests a need for the regulatory agencies. 24 .finding supports the argument that rating agencies have strong incentives to issue honest and accurate ratings to protect their reputation capital. such as the SEC. to monitor and evaluate the performance of the nationally recognized rating agencies whose ratings are used as regulatory tools.

yields for split rated bonds are compared with yields for the inferior rating. if investors price the inferior rating as well. The procedure is then reversed. (A1) j 1 j 1 j 1 17 8 25 Equation (A1) is called the Superior Rating Model. The SPLIT dummy variable reflects the fact that a split rated bond has an inferior rating (in addition to its split superior rating) not captured by the rating dummy variables. Specifically. βS should be significantly positive. The superior ratings are used to create seventeen rating dummy variables: SUP_RATINGj (j = 1 to 17). two treasury spread regression models are used. can be interpreted as the difference between the actual treasury spreads of split rated bonds and the estimated treasury spreads of these bonds if both rating agencies had assigned the same superior rating. SPLIT. βS should be insignificant. a dummy variable for split rating. To distinguish the split rated and non-split rated bond issues. Specifically. βS. the inferior second rating should increase yields since it conveys additional negative information. that is. the inferior ratings are used 25 . the coefficient for SPLIT. Alternatively. The first regression model compares treasury spreads for split rated bonds with non-split rated bonds with superior ratings. If yields for the split rated bonds are determined by the superior rating alone and the second rating has no impact.Appendix A We follow Livingston and Zhou’s (2010) methodology to estimate the information opacity premium of split rated bonds. In the second regression model. is included in the regression. Thus. The regression model is as follows: TSi    s *SPLITi   j *SUP_RATING ji   j *Control Variable ji    j *YEAR ji .

βI. |βS| and |βI|. should be same. or: A = (S+I)/2 = (N – |βS| + N + |βI|)/2 = N + (|βI| – |βS|)/2. the SPLIT variable reflects the fact that a split rated bond has a superior rating not captured by the rating dummy variables. then. Let N be the actual treasury spreads of split rated bonds and S (I) be the estimated treasury spreads if both rating agencies had assigned the same superior (inferior) rating. the absolute values of the two coefficients. there is no difference between the SUP_RATING and INF_RATING variables. can be interpreted as the difference between the actual treasury spreads of split rated bonds and the estimated treasury spreads of these bonds if both rating agencies had assigned the same inferior rating. The information opacity premium is shown in Figure A1. (A2) j 1 j 1 j 1 17 8 25 Equation (A2) is called the Inferior Rating Model. if there is an information opacity premium on split rated bonds. The regression model is as follows: TSi     I *SPLITi    j * INF_RATING ji    j * Control Variable ji    j * YEAR ji . If there is no information opacity premium on split rated bonds. then |βS| should be larger than |βI|. per Equation (A4). The final step compares the two coefficients. 26 . βS and βI. Thus. Conversely. the information opacity premium (PREM) is the difference of the absolute values of the two coefficients divided by two. Then. A1 For non-split rated bonds. the information opacity premium of split rated bonds is: PREM = N – A = N – (N + (|βI| – | βS|)/2) = (|βS| – |βI|)/2 (A3) (A4) That is.A1 Thus. as illustrated in Figure A1: S = N – |βS| I = N + |βI| Let A be the average of S and I. The coefficient for SPLIT.to create the rating dummy variables: INF_RATINGj (j = 1 to 17).

and J. Cantor. 2503-2520. R. Ramchand. “Split Ratings and Bond Reoffering Yields.. Butler. Lamy. R. S. Packer. 2000.. Garman. and P. G. and G.S. 2000. and L. Corporate Debt: Myth or Reality?” Journal of Finance 53. 1998. F. 1996. 83-93. Bank for International Settlements.” Working Papers No. Jostova. Ederington. M. L. 1985. 10-34. H.K. 2004. Mansi.” Journal of Fixed Income 7. Blume... “Why Split Ratings Occur?” Financial Management 15. Packer. Cantor. 1986. T...” Journal of Fixed Income 5. Packer.. Chordia.W. Goh. D. R.” Journal of Business 77. Lim. 1998. 1389-1413. 763-784. and S.. and C. “The Credit Rating Industry. M.” Financial Management 14. “Valuing Like-rated Senior and Subordinated Debt. A. “The Impact of SEC Rule 144A on Corporate Debt Issuance by International Firms.” Journal of Financial Economics 56. “Speed of Issuance and the Adequacy of Disclosure in the 144A High-Yield Debt Market. Cantor. “Split Ratings and the Pricing of Credit Risk. 27 . 569-585. Thompson. 1073-1097.. Harrison. “Credit Ratings and Complementary Sources of Credit Quality Information.. Marr. and M.” Journal of Insurance Regulation 15. Covitz..” Journal of Finance 62.” Review of Financial Studies 21.W. 1995.R. “The Declining Credit Quality of U. 37-47. 2002. Cole. 2004. and K. “Distance Still Matters: Evidence from Municipal Bond Underwriting. and F. 2003-68.A.E.S. G. Philipov. Basel Committee on Banking Supervision. R.. and F. F.. 1997. 59-65. Baker. “Bond Rating Agencies and Stock Analysts: Who Knows What When?” Journal of Financial and Quantitative Analysis 33. M. Fridson. D. “Assessing Credit Rating Agencies by Bond Issuers and Institutional Investors. 2007.W.Reference Avramov. and A. 3. “Testing Conflicts of Interest at Bond Rating Agencies with Market Anticipation: Evidence that Reputation Incentives Dominate. R. Chaplinsky. Billingsley. “Momentum and Credit Rating.” Journal of Fixed Income 7. 1367-1398.” Federal Research Working Paper No.” Journal of Business Finance & Accounting 29. 383-405. 72-82. L. 2008. 234-255. 1997. Fenn. Ederington. “Discretion in the Use of Ratings: the Case of the NAIC. Mackinlay.

S. “The Impact of Rule 144A Debt Offerings upon Bond Yields and Underwriter Fees. and L. and M. 751-767.G. Livingston. forthcoming. C. M. 874-888. W. 1993. Marr. and W. 28 .G. 2007.. “Asset Opaqueness and Split Bond Ratings. and L.” Journal of Financial Research 21. “Testing the Differences between the Determinants of Moody’s and Standard & Poor’s Ratings. M. 2005. A. Naranjo.R. Holthausen.. 57-89.” Journal of Financial and Quantitative Analysis 19.. “Comparing Possible Proxies of Corporate Bond Liquidity.. Thompson. “Split Ratings. Hsueh. Livingston.. Zhou. R.. “Shelf Registration: Competition and Market Flexibility. Leftwich. 1331-1358. forthcoming. John. 2007. 2010. W. 1987.Güttler. Kidwell. 181-206. Stotsky. and Underwriter Spreads for Industrial Bonds. 1987.S. M.. Livingston.” Journal of Banking and Finance 31. and L.. “The Impact of Split Bond Ratings on Risk Premia. “Split Bond Ratings and Information Opacity Premium. Ravid. and M. P.R. 2005.S. Kidwell.” American Economic Review 92. Wahrenburg.” Financial Markets and Portfolio Management 19. Moon. and G.” Financial Management 31. 46-53.. Livingston. Mentink. Thompson. 71-85. A. Zhou..” Financial Review 22. and R. Kidwell. Marr. “The Effect of Bond Rating Changes on Common Stock Prices. “Using a Bootstrap Approach to Rate the Raters. D. Moore. D.” Journal of Law and Economics 30. 49-62. and N. 1988.P. P.A.. Reisel. 1998. 2002. 51-69. D. “Rating Banks: Risk and Uncertainty in an Opaque Industry.” Journal of Applied Econometrics 8.. Güttler. A.” Journal of Financial Economics 17. 1984. Jewell. 1986. and T.” Financial Management 36. 183-195. 2010. Liu. “The Notching Rule for Subordinated Debt and the Information Content of Debt Rating. Vorst. Zhou. “The Adjustment of Credit Ratings in Advance of Defaults. Bond Yields.. 277-295. J. Houweling. “SEC Rule 415: the Ultimate Competitive Bid. and D.” Financial Management. 5-27. Morgan. and J.. and G.” Financial Management.” Journal of Banking and Finance 29. 2002.. 185-204. K.S. A. P. “Bond Ratings: Are Two Better Than One?” Financial Management 17.

Sommer. Yu. Wooldridge. and D.” Financial Review 26. Econometric Analysis of Cross Section and Panel Data.M. 231-241. 2005. Ratings. Rating Agencies and the Global Financial System. Levich. and C. Rating. 2002. “Modified Bond Ratings: Further Evidence on the Effect of Split Ratings on Corporate Bond Yields.G. L. “Accounting Transparency and the Term Structure of Credit Spreads.. 2003. Wooldridge. Reiter. F. Evans.” European Central Bank Working Paper No. 2002...C. Liu. 1988.W. and D.W. Eds. Walter. S. Pottier. Majnoni.M. 621-642. 1999. “Bond Yields. R. P.” Journal of Financial Economics 75.Perry. 517. “Rating Agencies: Is There an Agency Issue?” in R. Kluwer Academic Publishers. S. “Credit Ratings and the Standardised Approach to Credit Risk in Basel II. 2005.” American Economic Review 93. 53-84. J.” Journal of Business Finance & Accounting 15. and Financial Information: Evidence from Public Utility Issues.” The Journal of Risk and Insurance 6. 133-138. Ziebart. 1991.. “Property-liability Insurer Financial Strength Ratings: Differences across Rating Agencies. Reinhart. J..A. Cambridge. and D. MA: MIT Press.. 29 . Van Roy. and I. 45-73.. Smith.. Boston. G. P. “Cluster-Sample Methods in Applied Econometrics.M..

Treasury Spread (Basis Points) I: Non-Split Inferior Rating I S: Non-Split Superior Rating A: Average of Non-Split Superior and Inferior Ratings L: 30  SP 8 10 6. 30 . This figure illustrates the risk premium on split rated bonds over nonsplit rated bonds. The difference of 6. The difference of 10 basis points between SP and A and the 2-basis-point difference between M and A are derived from Table 7 and discussed in Section V. The difference of 30 basis points between I and S is the average difference in treasury spread between two adjacent ratings and is derived in Section V.5 2 L M A All Splits SP: Split-S&P Higher M: Split-Moody’s Higher S Superior Inferior Rating Figure 1.5 basis points between L and A are derived from Table 6 and also discussed in Section V. Split Rated Bond Risk Premium.

31 .450 400 350 300 Numer of Issues 250 200 150 100 50 0 AA-/A+ BBB/BB+ A-/BBB+ AAA/AA+ B/CCC+ A-/BBB BB/B+ BBB+/BBB BBB+/BBBCCC+/CCC AA+/AA AA-/A BBB-/BB+ AA/AAAA/A+ BB+/BB AAA/AA BBB/BBBAA+/AABBB-/BB B-/CCC+ A/BBB+ BB-/B+ A+/A BB/BBB+/B BB+/BBB-/CCC A/AA+/ABB-/B B+/BB/B- Superior S&P Rating Superior Moody's Rating Figure 2. Number of Split Rated Issues in Each Rating Category. This figure depicts the number of split rated bonds with superior S&P ratings and the number of splits with superior Moody’s ratings in each split rating category.

Information Opacity Premium Figure A1. N stands for the actual treasury spreads of split rated bonds. Illustration of Information Opacity Premium. 32 . The difference between N and A is the information opacity premium (PREM). I stands for the estimated treasury spreads on split rated bonds if both rating agencies had assigned the same inferior rating. S stands for the estimated treasury spreads on split rated bonds if both rating agencies had assigned the same superior rating. A is the average of I and S.

33 0.65% 22.84 1.Table 1 Summary Statistics This table reports the descriptive statistics of the Non-Split Rated sample.17 9.86 7.87 10.01 -1.17 89.91 10.33% 23.49% 2.45% 216.64% 37.27 9.43 10. Average Rating is the average of the Moody’s Rating and the S&P Rating.73 9.08% 35. of Obs.00 87.06% 26.80 11.60 10.01 9. and the Superior Moody’s Rating sub-sample.35 7.43 10.08% 40. the Superior S&P Rating sub-sample.41% 19.201 Split Rated Sample 235.691 Superior Moody’s Rating 225.07 13.15 83.86% 197.83% 60.33 10.70% 40.54% 44. The Moody’s Rating and the S&P Rating are two numerical variables ranging from 1(for CCC rating) to 18 (for AAA rating).90% 7.60 8.652 Superior S&P Rating 243.09% 33. Non-Split Rated Sample Proceeds (in million dollars) Maturity Yield to Maturity Treasury Spread (in basis points) Moody’s Rating S&P Rating Average Rating Rating Difference (Moody’s Rating – S&P Rating) % of Senior Bond % of Shelf-registration % of Utility Issues % of Rule 144A Issues % of Callable Bonds No.75% 6.28% 31.42% 37.33 10.52 8.94 -0.46 12.65% 61.46% 66.32% 59.94% 3.961 33 . 223.97% 215.42 9.18% 215.14 86.78 12. Split Rated sample.

49 66.46 82.68 369.73 553.29 311.**.42 151. 5% or 10% level.13 491.31 299.12 437.08 196.18 334.39 288.24 Superior Moody’s Rating 65.82 159.98 201. AAA/AA+ AAA/AA AA+/AA AA+/AAAA/AAAA/A+ AA-/A+ AA-/A A+/A A+/AA/AA/BBB+ A-/BBB+ A-/BBB BBB+/BBB BBB+/BBBBBB/BBBBBB/BB+ BBB-/BB+ BBB-/BB BB+/BB BB+/BBBB/BBBB/B+ BB-/B+ BB-/B B+/B B+/BB/BB/CCC+ B-/CCC+ B-/CCC CCC+/CCC Split Rated Sample 60.46 149.85 126.42 168.73*** 132.74*** 394.82 214.06 484.09 109.11 300.00 120. Superior S&P Rating sub-sample.05 446.30 157.76* 217.12*** 365.91** 132.67 183.17 309.84 Superior S&P Rating 54.99 120.78*** 475.37 88.11 81. 34 .65 66.19 111.22 94.64 716.95 819.09 115.33 277.00 150.03 569.32 233.41 89.26* 574.01 65.81 599.81 118.94 461.04 88.07 298.74 175.08 486.78*** 124.41 81.90 106.84 552.19 367. * indicate the difference between the Superior S&P Rating sub-sample and the Superior Moody’s Rating sub-sample is significant at the 1%.16 81.04 496.81 ***.74 626.73 191.77 81.91 173.19 101.43 333.80 240.34 62.89 558.13 113.70 104.69 112.74*** 82.10 401.43 366.86 67.37 92.78*** 515.67 177.47 191.53 363.12 331.Table 2 Mean Treasury Spreads of Split Rated Bonds by Rating Category This table reports the mean treasury spreads of each split rating category for the Split Rated sample.64 51.13 237. and Superior Moody’s Rating sub-sample.14 113.64 528.90 137.13 423.11 135.51 143.60*** 415.48 110.60** 92.09 583.

00) -45.00) -77. The control variables include 32 split rating dummy variables with BBB+/BBB as the base case. In Model 2.00) -46.00) -55.01) -12.27 (0.40 (0.06 (0.34 (0.00) -7.00) -47.31 (0.45 (0.00) -47.91 (0.00) -9.62 (0. In Model 3.66 (0.03) Model 3 56.38 (0.70 (0.75 (0. UTILITY equals 1 for utility issues. R144A equals 1 for Rule 144A issues.00) 29. Intercept SUPMOODY SUPMOODY1 SUPMOODY2 SUPMOODY_Notch SUPMOODY_Letter AAA/AA+ AAA/AA AA+/AA AA+/AAAA/AAAA/A+ AA-/A+ AA-/A A+/A A+/AA/AA/BBB+ A-/BBB+ A-/BBB BBB+/BBBBBB/BBBBBB/BB+ BBB-/BB+ BBB-/BB BB+/BB BB+/BB- Model 1 58.00) -49.22 (0.00) 197. SHELF equals 1 for shelf registered issues. SUPMOODY1 (SUPMOODY2) equals 1 if Moody’s rating is one (two) notch above the S&P rating.00) -67.83 (0.00) 60.47 (0.46 (0.85 (0. MATURITY is the natural log of the number of years to maturity.64 (0.00) 199.00) -72.60 (0.00) 63. The p-values (in the parenthesis) have been adjusted for potential clustering problems that might arise from multiple bond issues by the same firm.65 (0.20 (0.83 (0. 0 otherwise.00) 140.00) 140.00) 26.00) -81.00) -20.07 (0.02 (0.00) 35 .00) Model 2 57.32 (0.98 (0.00) -72.00) 28.89 (0.00) -54.00) -72.00) -5.00) 64.00) -54.64 (0.22 (0.00) 26.00) -45.38 (0.60 (0.26 (0.35 (0. SUPMOODY_Letter equals 1 if Moody’s rating is in a letter category superior to the S&P rating.98 (0. the test variables are SUPMOODY_Notch and SUPMOODY_Letter.54 (0.00) -67.00) 101.00) -59.05 (0.00) -50.00) 67.72 (0.00) -47.00) 140.00) 64. The dependent variable is the treasury spread in basis points. 0 otherwise. 0 otherwise.34 (0.62 (0.43 (0.00) 61.00) -8.66 (0.35 (0.89 (0.54 (0.64 (0.00) -13.76 (0.19 (0.37 (0.58 (0. RISKPREM is the difference (in basis points) between Moody’s AAA Bond Index Yield and 10-Year Treasury yield.32 (0.00) 26. In Model 1.00) -55.64 (0.40 (0.13 (0.00) 27.35 (0.00) -15.Table 3 Treasury Spread Regressions for Split Rated Sample This table reports the treasury spread regression results for the Split Rated sample.70 (0.00) -67.00) -81.00) 102.00) -45.60 (0. 0 otherwise.83 (0.00) -11.93 (0.00) -55.00) -24. 0 otherwise.00) -45.22 (0. PROCEEDS is the gross proceeds of the bond issue in millions of dollars.00) -59. SUPMOODY_Notch equals 1 if Moody’s rating is above the S&P rating but they are in the same letter rating category. the test variables are SUPMOODY1 and SUPMOODY2.00) -73. 0 otherwise.70 (0.00) -73. the test variable is SUPMOODY. 0 otherwise.00) -55.00) 198.41 (0.95 (0.40 (0. equal to 1 if Moody’s assigns a superior rating and 0 otherwise.30 (0.00) 103.00) -24.00) -51. The regressions also include 25 year dummies with 2008 as the base case.00) -53.91 (0.33 (0.94 (0.00) -75.00) -7.00) -56.52 (0.00) -5.23 (0. CALL equals 1 for callable bonds.09 (0.86 (0.07) -13. SENIOR equals 1 for senior bonds.

R-squared 137.04 (0.41 (0.29 (0.00) Yes 6.03) 420.07) -16.58 (0.00) -12.03) 422.40 (0.00) 8.00) Yes 6.65 (0.26 (0.89 (0.08 (0.00) 463.49 (0.62 (0.70 (0.99 (0.00) Yes 6.00) 439.00) 8.04 (0.09) 59.93 (0.BB/BBBB/B+ BB-/B+ BB-/B B+/B B+/BB/BB/CCC+ B-/CCC+ B-/CCC CCC+/CCC MATURITY PROCEEDS SENIOR UTILITY CALL R144A SHELF RISKPREM Year dummies No.01 (0.81 36 .50 (0.09) 59.85 (0.00) 360.00) 360.652 0.00) 13.37 (0.00) 13.68 (0.81 138.01 (0.00) 233.28 (0.01) 17.62 (0.04 (0.00) 289.00) 214.00) 289.64 (0.00) 331.85 (0.68 (0.00) 229.06) 594.53 (0.00) 212.00) 229.652 0.00) -12.81 137.56 (0.01 (0.48 (0.96 (0.07) -16.00) 434.29 (0.27 (0.02) 17.00) 360.01) 17.60 (0.00) 282.00) -0. of Obs.92 (0.07) -16.652 0.00) 280.00) 329.00) 1.05 (0.25 (0.00) -12.41 (0.00) 1.00 463.09) 59.53 (0.00) 8.00) 13.00) 289.02 (0.62 (0.00) 215.51 (0.79 (0.51 (0.00) -0.06) 594.00) 284.00) 437.39 (0.79 (0.88 (0.07 (0.03) 417.04 (0.00) 329.02 (0.00) -0.00) 1.73 (0.12 (0.00) 468.06) 594.90 (0.80 (0.01 (0.76 (0.

66 -77.78 0.56 22.66 0.77 -94.14 0. of Obs 42 26 123 36 285 77 338 86 643 106 599 109 559 123 685 81 492 53 186 49 142 53 187 40 197 55 386 103 543 39 142 37 30 R-squared 0.45 -25.70 0.04 0.83 19.30 0.89 -33.55 0.76 0.16 0.77 0.59 -28.05 0.42 0.04 0.68 -18.22 0.77 0.18 0.02 0.38 -122.82 -23.22 -6.02 0.53 0.93 0.91 0.00 0. The coefficients on SUPMOODY are reported with the cluster-robust p-values.84 0.30 -12.59 0.75 0.45 59.14 -12.65 0.47 0.22 0.58 37 .38 0.53 0.88 0.15 0.07 0.42 0.11 -2.00 0.24 -0.86 -5.14 0.35 -19.47 0. Model 1 (from Table 3) treasury spread regressions without the split rating dummy variables are estimated for each split rating category.86 0.38 -28.26 0.44 -116.00 0.12 -1.75 0.49 32.00 p-value 0.77 0.06 0.55 No. AAA/AA+ AAA/AA AA+/AA AA+/AAAA/AAAA/A+ AA-/A+ AA-/A A+/A A+/AA/AA/BBB+ A-/BBB+ A-/BBB BBB+/BBB BBB+/BBBBBB/BBBBBB/BB+ BBB-/BB+ BBB-/BB BB+/BB BB+/BBBB/BBBB/B+ BB-/B+ BB-/B B+/B B+/BB/BB/CCC+ B-/CCC+ B-/CCC CCC+/CCC SUPMOODY 9. The last two columns report the number of observations and the R-squared value for each regression.79 0.79 -13.07 -30.41 -31.01 0.70 -168.50 0.69 0.26 0.82 0.70 0.12 0.91 -30.66 0.69 0.82 0.21 0.32 -39.75 0. Some control variables are dropped from the regressions when there is only one level of variation.02 0.68 0.30 -34.84 0.58 0.Table 4 Treasury Spread Regressions for Split Rated Sample for Each Rating Category The dependent variable is the treasury spread in basis points.99 0.83 0.84 0.63 16.54 8.80 0.54 -3.

43 (0.00) n.00) 468.01) n.00) 207.00) 287.63 (0.30) -21.07) 58.66 (0.21 (0.00) -32.59 (0.18) 486. This table reports results of the Model 1 (from Table 3) treasury spread regressions for several sub-samples.00) 59.00) .72 (0.01) 34.00) 149.57 (0.00) 148.00) .00) 213.62 (0.00) 619.22 (0.21 (0. The fourth column contains the Rule 144A sample.73 (0.03) 90.00) -79.00) -68.58 (0.86 (0.84 (0.00) 232.40 (0.00) 181.61 (0.00) 166.00) 138.54 (0.00) -16.90 (0.59.76 (0.18 (0.00) -58.00) 295.15 (0.00) 204.47 (0.00) -3.09 (0.00) 376.19) -176.00) -46.00) 247.00) 18.00) 320.61 (0.07) -78.68 (0.81 (0.74 (0.00) -63.74 (0.54.30 (0.36) -7.85.15 (0.00) 670.00) 111.58) -10.45 (0.51 (0.84 (0.20 (0.28) -22.00) 363.a.98 (0.00) 92.34 (0.71 (0.20 (0.95 (0.23 (0.00) 282.91) -16.00) -59.96 (0. The p-values (in parentheses) have been adjusted for potential clustering problems that might arise from multiple bond issues by the same firm.09 (0.65) -13.00) -60.00) -49.42) -67.74 (0.00) -53.00) n.45 (0.46 (0.29.79.61 (0.00) .70 (0.00) -8.12 (0.00) -89.74 (0.02 (0.43 (0.20) 190.29 (0.00) .21 (0.00) 270.70 (0.10) -20.00) 303. 488.03) 28.79 (0.00) .00) 127.00) 500.00) -52.Table 5 Treasury Spread Regressions for Split Rated Sub-Samples The dependent variable is the treasury spread in basis points.03) 29.12 (0.00) .34 (0.83 (0.20 (0.50.47 (0.00) 343.00) 287.00) 282.12 (0.09 (0.50 (0.00) -49.00) -58.68 (0.00) -4.25 (0.27 (0.10 (0.00) 490.00) -9.81 (0.56.00) -62.01 (0.04) 22.93 (0.02) -70.00) 1998-2008 Non-Rule 144A 28.02 (0.08 (0.00) n.00) 432.89) -9.31 (0.28 (0.56 (0.a.29 (0.81.37 (0.00) -33.00) -24.12.00) -76.00) .12 (0.78 (0.00) 78.00) 134.61 (0.20) 237.00) 1998-2008 -11.00) 140.55 (0. Intercept SUPMOODY AAA/AA+ AAA/AA AA+/AA AA+/AAAA/AAAA/A+ AA-/A+ AA-/A A+/A A+/AA/AA/BBB+ A-/BBB+ A-/BBB BBB+/BBBBBB/BBBBBB/BB+ BBB-/BB+ BBB-/BB BB+/BB BB+/BBBB/BBBB/B+ BB-/B+ BB-/B B+/B B+/BB/BB/CCC+ B-/CCC+ B-/CCC CCC+/CCC MATURITY 1983 -1997 -70.00) 18.97 (0.81 (0.76 (0.00) 236.00) 259.42 (0.45 (0.72 (0.00) -47.51 (0.00) 297.89 (0.36 (0.28 (0.00) 1998-2008 Rule 144A Issue 66.00) 370.a -61.02 (0.99 (0.59 (0.77 (0.08) 37.a 19.00) 87.81 (0.00) -59.61 (0.00) 454.00) 460.57 (0.23 (0.00) 184.00) -54.10 (0. The first two columns report the results for two sub-samples of different time periods: 1983 – 1997 and 1998 – 2008.00) 65.00) 75.65 (0.02 (0.19) 38 .01) 131.03 (0.07 (0.25 (0.00) 166.10 (0.20 (0.50 (0.47 (0.00) .21) 28.00) .92 (0.72 (0.00) 115.55 (0. The third column excludes Rule 144A issues.13.00) -63.11 (0.23 (0.21 (0.00) 50.78 (0.12) -82.00) -16.00) -7.47.39 (0.02 (0.01) 3.98 (0.00) 395.86 (0.14) .55 (0.00) 456.01) 29.12 (0.66 (0.60 (0. -97.00) 512.82 (0.79 (0.87) 408.00) -180.98 (0.43 (0.03 (0.85 (0.90 (0.48 (0.00) 61.00) 195.53 (0.00) -48.07 (0.00) -47.59) 65.00) .00) 289.89 (0.00) 323.87 (0.

91) 1.38 (0.01) 0.17 (0.00) 65.01 (0.78 (0.20 (0.24 (0.75 0.40 (0.07 (0.12) 13.07) 15.90 (0.339 0.16 (0. of Obs.00) -20.01) -0.00) Yes 3.98) 1.18 (0.19 (0.a 2. R-squared -0.022 0.313 0.00) 13.74) n.25 (0.43 (0.01) Yes 1.00) -38.43) -7.13) -10.66 39 .58 (0.11 (0.74 (0.55 (0.PROCEEDS SENIOR UTILITY CALL R144A SHELF RISKPREM Year dummies No.20) 9.01 (0.02 (0.08) 75.00) Yes 3.16 (0.12) 29.62 (0.70 -0.38 (0.88 -0.02 (0.00) 4.22) 51.22) 1.291 0.00) Yes 2.00) -3.00) -10.29 (0.

28 (0.00) 546.00) -60.33 (0.51 (0.72 (0. 0 otherwise.853 0.33 (0.00) 392.00) -11.00) -35. we use the superior (inferior) rating of split rated bonds to construct the rating dummy variables.00) 507.00) 15.00) Yes 13. R144A equals 1 for Rule 144A issues.39 (0.79 (0. R-square Superior Rating Model 36.00) -53.00) -21.00) -11.00) 488.00) 13.50 (0.26 (0. The base case is BBB+ rated bonds.13 (0.06 (0.00) 93.00) 17. CALL equals 1 for callable bonds. of Obs.00) -66.00) 17.853 0.38 (0.00) -61.25 (0.00) 157.00) 282.21 (0.86 (0.21 (0. Thus.58 (0.58 (0.98 (0.32 (0.12 (0.00) 461.00) -84.72 (0.00) 60.00) -37.00) 24.41 (0.00) 0.00) -90.27 (0.96 (0.29 (0.00) 42. the coefficient for SPLIT measures the impact of the Inferior (Superior) second rating on the treasury spreads of split rated bonds.00) 14. In the Superior (Inferior) Rating Model.00) 161.00) 318.18 (0.42 (0.00) 48.52 (0.00) -10.00) 252.49 (0.81 Inferior Rating Model 43.33 (0.00) -0.41 (0.00) 10. The p-values (in parentheses) have been adjusted for potential clustering problems that might arise from multiple bond issues by the same firm.00) -65.Table 6 Information Opacity Premium Regressions for Full Sample The dependent variable is the treasury spread in basis points.67 (0.00) 183.00) 219. The regressions also include 25 year dummies with 2008 as the base case.11 (0.00) 423. SHELF equals 1 for shelf registered issues.000 -74.89 (0.86 (0. 0 otherwise.02) -15.20 (0.00) -52. SENIOR equals 1 for senior bonds.14 (0.01 (0. 0 otherwise.00) Yes 13.65 (0.80 (0. 0 otherwise.01 (0.35 (0.09) -17.87 (0. PROCEEDS is the gross proceeds of the bond issue in millions of dollars.00) -42.25 (0.57 (0.76 (0. Intercept SPLIT AAA AA+ AA AAA+ A ABBB BBBBB+ BB BBB+ B BCCC+ CCC MATURITY PROCEEDS SENIOR UTILILTY CALL R144A SHELF RISKPREM YEAR Dummies No. MATURITY is the natural log of the number of years to maturity.00) -21.00) 17.00) -0.98 (0.81 40 . UTILITY equals 1 for utility issues.85 (0.00) 349.00) 7. RISKPREM is the difference (in basis points) between Moody’s AAA Bond Index Yield and 10-Year Treasury yield.07) 63.00) 137.80 (0.28 (0.00) 0.28 (0.03 (0. 0 otherwise.18 (0. SPLIT is equal to 1 for split rated bonds and 0 otherwise.

R144A equals 1 for Rule 144A issues.70 (0.87 (0.00) -49.71 (0.00) A+ -51.37 (0.00) -60.00) 0.00) 65.00) 153.00) -35.49 (0.47 (0.43 (0. The base case is BBB+ rated bonds.00) -69.00) 60. RISKPREMIUM is the difference (in basis points) between Moody’s AAA Bond Index Yield and 10-Year Treasury yield.00) 10.32 (0.00) .00) AA-63.00) 12.06) -0.07) 65.00) -57. CALL equals 1 for callable bonds.16 (0.34 (0.00) -18.00) BBB43.892 41 .72 (0.88 (0.01 (0.98 (0. SENIOR equals 1 for senior bonds.22 (0.00) 258.01) 40.74 (0.00) 487.51 (0. we use the superior (inferior) rating of split rated bonds to construct the rating dummy variables.00) 107.8.00) 345.59 (0.16 (0.65 (0.00) -36.00) 89.30 (0. The p-values (in parentheses) have been adjusted for potential clustering problems that might arise from multiple bond issues by the same firm.00) BB210.00) 176.00) PROCEEDS -0.00) 423.00) 41.98 (0. 10.08 (0.00) -43.76 (0. Superior Moody’s Splits and Non-Splits Superior Inferior Rating Model Rating Model Intercept 37.00) -61.73 (0.01 (0. 0 otherwise.33 (0.83 (0.93 (0.46 (0.00) 328.56 (0.62 (0.00) 569. 0 otherwise.00) 320.79 (0.00) 286.00) AAA -86.00) -18.00) AA -67.75 (0.81 (0. The regressions also include 25 year dummies with 2008 as the base case.49 (0.31 (0.00) 14.00) 255.95 (0.00) -47.58 (0.01 (0.07 (0.51 (0.01) 44.00) 515.13 (0.00) BB+ 131.00) 197.52 (0.92 (0.00) B 347.00) MATURITY 17.92 (0.26 (0.00) 0.00) A -36.03 (0. Thus.27 (0.61 (0.00) 456.00) -8.59 (0.94 (0.00) 15.00) 17.00) -89.000 -90.08 (0.14 (0.41 (0.45 (0.71) 7.14) -16.71 (0. PROCEEDS is the gross proceeds of the bond issue in millions of dollars.00) -67.50 (0.00) 12.21 (0.23 (0.00) 0.74 (0.70 (0.96 (0.00) BB 175.16 (0.48 (0.00) 460. 0 otherwise.86 (0.00) RISKPREM 0.38 (0.Table 7 Information Opacity Premium Regressions for Two Subsamples The dependent variable is the treasury spread in basis points.58 (0.00) CALL 14.00) -66.84 (0. In the Superior (Inferior) Rating Model.00) B419.23 (0. of Obs.23 (0. 0 otherwise.00) -0.29) -0. UTILITY equals 1 for utility issues.00) -63.37 (0.00) 401.19) SENIOR 65.35 (0.00) 558.00) -19.162 10.55 (0.00) 38.00) BBB 14.47 (0.162 Superior S&P Splits and Non-Splits Superior Inferior Rating Model Rating Model 34.64 (0.00) A-22.99 (0.00) CCC 464.03 (0. SPLIT is equal to 1 for split rated bonds and 0 otherwise.00) -83.00) 128.00) 18.00) -56.01 (0.00) 44.73 (0.71 (0.95 (0.00) -16.00 (0.00) .00) 18.10 (0.50 (0.9.00) B+ 268.94 (0.00) 9. MATURITY is the natural log of the number of years to maturity.00) UTILILTY -11.20 (0.00) 181.00) -37.52 (0.01 (0. the coefficient for SPLIT measures the impact of the Inferior (Superior) second rating on the treasury spreads of split rated bonds.74 (0.07) 7.42 (0.00) 14.12) SHELF -17.00) YEAR Dummies Yes Yes No.35 (0.44 (0.63 (0. 0 otherwise.892 10.00) CCC+ 521.38 (0.15 (0.00) -22. SHELF equals 1 for shelf registered issues.00) 217.13 (0.00) AA+ -79.97 (0.98 (0.00) -10.00) 28.97 (0.00) -65.00) -14.00) Yes Yes 10.00) SPLIT 20.37 (0.00) R144A 1.33 (0.95 (0.45 (0.00) 400.40 (0.78 (0.68 (0.00) 157.93 (0.