NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Are All Ratings Created Equal? The Impact of Issuer Size on the Pricing of Mortgage-backed Securities

Jie (Jack) He, Jun 'QJ' Qian, Philip E. Strahan

NBER Working Paper No. 17238
Issued in July 2011
NBER Program(s):   CF

We examine whether rating agencies (Moody’s, S&P, and Fitch) reward large issuers of mortgage-backed securities, who bring substantial business, by granting them unduly favorable ratings. The initial yield on both AAA-rated and non-AAA rated tranches sold by large issuers is higher than that on similar tranches sold by small issuers during the market boom years of 2004-2006. Moreover, the prices of MBS sold by large issuers drop more than those sold by small issuers, and the differences are concentrated among tranches issued during 2004-2006. We conclude that large issuers receive more favorable ratings and that the market prices the risk of inflated ratings, especially during booming periods.

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Document Object Identifier (DOI): 10.3386/w17238

Published: A RE ALL R ATINGS C REATED E QUAL ? T HE I MPACT OF I SSUER S IZE ON THE P RICING OF M ORTGAGE -B ACKED S ECURITIES , 2012, Journal of Finance 67(6), 2097-2138, with Jie He and Jun Qian.

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