University of Georgia
Terry College of Business
Department of Banking and Finance
424 Brooks Hall
Athens, GA 30602
NBER Working Papers and Publications
|July 2011||Are All Ratings Created Equal? The Impact of Issuer Size on the Pricing of Mortgage-backed Securities|
with Jun 'QJ' Qian, Philip E. Strahan: w17238
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.
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.