Are unsolicited credit ratings biased downward?

There has been considerable controversy over unsolicited credit ratings in recent years. Some dissatisfied issuers allege that unsolicited ratings are biased downward in contrast to solicited ratings. This is the first empirical study to analyze the controversy using pooled time-series cross-sectional data of 265 firms in 15 countries from Standard and Poor's Ratings Services (SandP's) during the period of 1998-2000. The results demonstrate that unsolicited ratings are lower. On the other hand, I also find that those issuers who choose not to obtain rating services from SandP's have weaker financial profiles. Although the difference in ratings can be explained by this significant self-selection bias, results of the Japanese sub-sample indicate that unsolicited ratings are still lower than solicited ratings after controlling for differences in sovereign risk and key financial characteristics.