Department of Business Administration2024-11-0920190022-108210.1111/jofi.128202-s2.0-85068028740http://dx.doi.org/10.1111/jofi.12820https://hdl.handle.net/20.500.14288/11819Past studies document that incentive conflicts may lead issuer-paid credit rating agencies to provide optimistically biased ratings. In this paper, we present evidence that investors question the quality of issuer-paid ratings and raise corporate bond yields where the issuer-paid rating is more positive than benchmark investor-paid ratings. We also find that some firms with favorable issuer-paid ratings substitute public bonds with borrowings from informed intermediaries to mitigate the "lemons discount" associated with poor quality ratings. Overall, our results suggest that the quality of issuer-paid ratings has significant effects on borrowing costs and the choice of debt.BusinessFinanceEconomicsJournal Article1540-6261486327100011Q12054