The Value of a Third Opinion: Split Ratings, Information Opacity and Fitch Ratings

Miles Livingston, University of Florida

8th Jun 2012  11:30 am - Room 214/215, H69 - Economics and Business Building

We examine the marginal impact of Fitch rating on the yields at issuance of industrial and utility bonds rated by both Moody's and S&P.  We find that Fitch ratings reduce the yield premiums on information opaque bond issues. The finding is robust even when a Fitch rating exactly equals the average of the two major ratings. However, for non-opaque bonds, an additional rating from Fitch has no impact on bond yields. We measure opacity in two ways: split ratings and an index of commonly used proxies for opacity. We estimate that a Fitch rating reduces the opacity premium on informational opaque bond issues proportionally by 30% to 40%, or 9-14 basis points. When ratings are split and the opacity levels are high, a Fitch rating has the largest reduction in bond yields.