We examine whether "rating shopping" or "rating catering" is a more accurate characterization of rating agency interactions regarding collateralized debt obligations (CDOs). Although investors paid a premium for dual ratings, AAA CDO tranches rated by both Moody's and S&P defaulted more frequently than tranches rated by only one of them, which is inconsistent with pure rating shopping. Rating agencies made upward adjustments beyond their model when their competitor had more lenient assumptions.

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... Finally, consistent with rating catering, S&P's and Moody's adjustments and disagreements at security issuance were reflected in subsequent rating downgrades, suggesting that adjustments were harmful. (JEL G14, G24, G28, G32) By both facilitating the housing bubble and triggering massive write-downs for banks, structured products and their credit ratings are often perceived to be For their helpful discussion, we thank Alexander Ljungqvist (the editor), an anonymous referee, Dion Bongaerts, among the most important drivers of the 2007-2009 credit crisis. 1 A striking feature of this episode is that major rating agencies unanimously gave AAA ratings to trillions of dollars of collateralized debt obligations (CDOs). Several theories have offered competing models and policy solutions regarding rating agency competition and rating inflation. Most of these models are customized to the universe of complex securities; yet, surprisingly little empirical work has examined the role of rating agency competition within structured finance ratings. In this paper, we use unique data to empirically evaluate "rating shopping" and "rating catering" as explanations for CDO credit rating agency behavior. The first and often-cited view called "rating shopping" refers to a situation in which issuers solicit ratings from multiple agencies and then choose the most favorable ones (as modeled by Skreta and Veldkamp 2009; Faure-Grimaud, Peyrache, and Quesada 2009; Farhi, Lerner, and Tirole 2011) . In this line of analysis, even though rating agencies adhere to their standards and issue unbiased ratings, rating inflation is a natural consequence of the rating shopping process and is not driven by the rating agencies. Hence, if rating solicitation is publicly disclosed (as called for by Dodd-Frank), 2 then rating shopping will be innocuous as investors can infer the true value of CDOs from the number of ratings initially solicited and those finally granted.