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 χ 2 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.