Unveiling Rating Bias through Synthetic Controls: The Case of Moody’s and Berkshire

Abstract This paper investigates whether Moody’s transition to a publicly traded company in October 2000 compromised its independence as a credit rating agency. Using the synthetic control method, we construct a counterfactual credit rating trajectory for firms affiliated with Berkshire Hathaway—Moody’s largest shareholder post-IPO—and compare it to their actual post-IPO ratings. Our results reveal a significant and persistent inflation in credit ratings for Berkshire-affiliated firms relative to their synthetic counterparts, peaking at nearly two notches by 2005 and gradually dissipating thereafter. The magnitude of the estimated effect is substantially larger than prior studies employing conventional difference-in-differences approaches. Placebo and robustness checks confirm the statistical significance of the findings. These results highlight the influence of concentrated ownership in reputation-sensitive industries and raise concerns about conflicts of interest in credit rating agencies. The study contributes to the literature on credit rating inflation and shareholder activism, offering new evidence on the potential for large shareholders to distort institutional incentives and market information.