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- Title
SHOULD ALL TAX-EXEMPT BORROWERS WITH INVESTMENT-GRADE QUALITY ACQUIRE CREDIT RATINGS?
- Authors
Hsueh, L. Paul; Liu, Y. Angela
- Abstract
In this study, we examine why some investment-grade quality borrowers choose not to acquire a bond rating. By analysing the quality revelation and certification functions of credit rating, our empirical findings show that, even without a credit rating, investors in the primary market are able to differentiate between Baa and Below-Baa quality issues and impose an average premium of 26 basis points of interest cost on the Below-Baa issues. For bonds of similar credit quality, our results show that, by obtaining a credit rating, a Baa quality borrower saves on average 41 basis points in interest costs, and this reflects largely the certification value of a Baa rating. Finally, we find that the value of acquiring a credit rating increases with the size of the market in which a bond is offered. Although acquiring a bond rating on average reduces the interest cost of a borrower, our findings suggest that for many investment-grade quality borrowers, the decision of not obtaining a bond rating is justified because, for these small issuers, the total costs of obtaining a credit rating become higher while the benefits become lower.
- Subjects
TAX exemption; CREDIT ratings; BONDS (Finance)
- Publication
Journal of Business Finance & Accounting, 1993, Vol 20, Issue 2, p291
- ISSN
0306-686X
- Publication type
Article
- DOI
10.1111/j.1468-5957.1993.tb00666.x