Testing the differences between the determinants of Moody's and standard & poor's ratings: an application of smooth simulated maximum likelihood estimation

This paper extends previous studies on bond ratings by modeling as a system of equations the determinants of a municipality's decision to obtain a bond rating and the determinants of the municipality's rating for the two major rating agencies. Our model provides a framework to examine formally the differences between the two agencies in the determinants of the ratings. We estimate the four-equation system by smooth simulated maximum likelihood estimation and then construct minimum χ2 tests on cross-equation restrictions based on optimal minimum distance estimation. Self-selection is found to be important in Moody's ratings while not in those of S&P. Split ratings appear to reflect differences in both the weight attached to specific determinants of the ratings and differences in the way the bonds are classified.