We document that rating agencies have become more conservative in assigning credit ratings to corporations over the period 1985 to 2009. Holding firm characteristics constant, average ratings have dropped by 3 notches (e.g., from A+ to BBB+) over time. Consistent with the view that this increase has not been fully warranted, we find that defaults for both investment grade and non-investment grade firms have declined over time. This increased stringency has also affected capital structure and

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... t spreads. Firms that suffer most from this conservatism issue less debt and have lower leverage. However, their debt spreads are lower compared to the spreads of firms that have not suffered from this conservatism, which implies that the market partly undoes the impact of conservatism on debt prices. This evidence suggests that firms and capital markets do not perceive the increase in conservatism to be fully warranted. In the wake of the financial crisis, rating agencies have come under increasing scrutiny. They have been accused of peddling to the companies and institutions that issue the securities they rate, because the issuers pay their fees in most instances. According to some observers, this conflict of interest has led the agencies to relax their standards, leading to ratings that were too generous relative to the default risk of the securities. 1 In this paper, we shed light on the standards employed by rating agencies. We study corporate debt ratings, not the ratings of mortgage backed securities or collateralized debt obligations. For corporate debt ratings, we do not find any evidence that rating agencies have reduced their standards. On the contrary, we find that rating agencies have become more conservative over time. This phenomenon was first documented by Blume, Lim, and MacKinlay (1998) over the period 1978-1995. We show that this trend has continued until at least 2009. This increased conservatism is not only important statistically, but is also large economically. For example, a firm with a AAA rating in 1985 would only qualify for a AA-rating by 2009, holding all the determinants of the ratings constant, while a firm with a BBB rating in 1985 would have lost its investment grade rating 20 years later. Given that many financial institutions made capital allocation decisions based on these ratings, and ultimately failed, the rating agencies have, in fact, been accused of lying at the basis of the crisis (see, for example, Partnoy, 2009). We conduct a variety of tests to show that these results are robust. First, our results are not due to the entry of new firms; holding the sample of companies constant in 1985, we still find that standards have increased, and, as a consequence, ratings have worsened. In addition, our findings are 1 A paper articulating this theme is Mason and Rosner (2007), who argue that conflicts of interest may have led to lax rating standards for structured finance products in the years leading up to the recent financial crisis. In fact, Griffin and Tang (2012) report that one of the top rating agencies frequently made positive adjustments to ratings beyond its main quantitative model. In related work, Becker and Milbourn (2011) argue that increased competition led rating agencies to adopt more issuer-friendly ratings over time. Empirical support for the alternative view that reputational concerns of bond rating agencies motivate them to issue "accurate" ratings is provided in Covitz and Harrison (2003). Acharya, V.V., S.A. Davydenko, and I.A. Strebulaev, 2011, Cash holdings and credit risk, Working paper,