Are All Ratings Created Equal? The Impact of Issuer Size on the Pricing of Mortgage-Backed Securities


  • JIE (JACK) HE,

  • JUN (QJ) QIAN,


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    • He is at the Terry College of Business, University of Georgia; Qian and Strahan are at the Carroll School of Management, Boston College and are affiliated with the Wharton Financial Institutions Center. Strahan is also affiliated with the NBER. We appreciate helpful comments from Cam Harvey (Editor); an Associate Editor; two anonymous referees; Efraim Benmelech; Patrick Bolton; Jess Cornaggia; Gerard Hoberg; Christopher James; Brian Quinn; Amit Seru; Joel Shapiro; Richard Stanton; Dragon Tang; James Vickery; and seminar/session participants at Boston College, Brigham Young University, DePaul University, Federal Reserve Bank of New York, London School of Economics, Northwestern University, Queen's University (Canada), Simon Fraser University, University of Florida, University of Maryland, American Economic Association meetings (Denver), China International Conference in Finance (Beijing), European Finance Association meetings (Frankfurt), the 21st Conference on Financial Economics and Accounting (College Park), and the NBER conference on securitization. We thank Calvin Chau, Hugh Kirkpatrick, Sailu Li, Yingzhen Li, and Chenying Zhang for excellent research assistance and Boston College and University of Georgia for financial support.


Initial yields on both AAA-rated and non-AAA rated mortgage-backed security (MBS) tranches sold by large issuers are higher than yields on similar tranches sold by small issuers during the market boom years of 2004 to 2006. Moreover, the prices of MBS sold by large issuers drop more than those sold by small issuers, and the differences are concentrated among tranches issued during 2004 to 2006. These results suggest that investors price the risk that large issuers received more inflated ratings than small issuers, especially during boom periods.