Large Shareholders and Credit Ratings

This paper addresses regulatory concerns that large shareholders of credit rating agencies may influence the rating process. Unlike S&P which is a privately held division of McGraw Hill, Moody's is a public company listed on the NYSE. Over the period 2001 to 2010, Moody's had two shareholders, Berkshire Hathaway and Davis Selected Advisors, who collectively own about 23.5% of Moody's. Moody's ratings on bonds issued by important investee firms of these two stable large shareholders were more favorable relative to S&P's, as well as Fitch, ratings. We exploit Moody's IPO in 2000 to address endogeneity and to mitigate concerns that the results are driven by issuer characteristics or by the greater informativeness of Moody's ratings. S&P's parent, McGraw Hill, has a large shareholder for much less time, and there is some weak evidence that S&P ratings are relatively more favorable towards the owners of its parent. These findings are consistent with regulatory concerns about the ownership and governance of rating agencies, especially those that are publicly listed