CREDIT RATINGS AND THE MARKET FOR GENERAL OBLIGATION MUNICIPAL BONDS

Abstract

A model of the general obligation municipal bond market provides for an analysis of the credit rating process and for a test of the assumption that credit ratings affect municipal borrowing costs. It is found that published credit ratings do have an effect on municipal yields which is independent of the market's evaluation of the financial status of the rated communities. For this reason, the potential discriminatory behavior of rating agencies is worthy of considerable attention.