Does Split Rating Affect Corporate Bond Yields? Evidence from North America and Europe

Abstract

The paper aims to determine the effect of split ratings on corporate bond yields. A Two-Sample t-Test was conducted for each risk category of bonds to assess the impact of split ratings. Using a sample of corporate bonds issued between January 2000 and May 2023, the study finds evidence that split-rated bonds exhibit higher yields. This suggests that investors demand greater compensation for the risk associated with split ratings, which stems from the informational opaqueness and uncertainty surrounding these instruments. The research also reveals that the magnitude of the difference between split ratings affects bond yields, with larger gaps leading to higher yields. The findings have significant implications for investors and issuers, emphasising the need to carefully evaluate split-rated bonds and consistent credit ratings. By enhancing our understanding of the relationship between split ratings and bond yields, this research promotes transparency and informed decision-making in the corporate bond market.