Jess Cornaggia
Indiana University Bloomington - Kelley School of Business

Kimberly Rodgers Cornaggia
American University - Kogod School of Business

John Hund
Rice University - Jesse H. Jones School of Management

Abstract
Contrary to assertions by the Big 3 credit raters, credit ratings are not comparable across asset classes. Default frequencies, ratings transition matrices, and ratings change regression models all suggest that relative to traditional corporate bond ratings, municipal and sovereign issuers have been rated more harshly and structured products have been rated more generously. Over the period 1980-2010, municipalities exhibited less risk of loss than their bond insurers, which calls the value to taxpayers of bond insurance into question. 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 attributable to issuer opacity. These results contribute to the debate surrounding regulatory reliance on credit ratings and the current SEC proposal to standardize rating standards by asset class.