Credit rating agencies and conflict of interest

While formal anecdotal evidence of credit rating agencies flouting conflict of interest guidelines have been published by the SEC and the Senate, statistical evidence of this has yet to be found. Taking advantage of the bond rating refinement undertaken by Moody’s on April 26 1982, as well as the fact that rating fees are positively related to the number or size of new bond issues, we examine the relationship between the bond rating refinements and the number and size of new bond issues within the five years before and after the refinement. We find evidence that bond "upgrades" are positively correlated with the number and size of new bond issues before the refinement, and that bond "downgrades" are similarly negatively correlated, which may be indicative of a manifested conflict of interest at Moody’s during the bond rating refinement of April 26 1982.