Does the market differentiate between investor-paid and issuer-paid ratings in the pricing of asset-backed securities?

We examine the relative effects of investor-paid and issuer-paid ratings on the at-issuance pricing of China's asset-backed securities (ABS). In theory, issuer-paid ratings are more prone to rating inflation but are more informative than investor-paid ratings. Empirically, we find that investorpaid ratings are significantly more conservative than issuer-paid ratings, on average. Also, the market does differentiate between issuer-and investor-paid ratings in ABS pricing. For split rated issues, the yield spread is higher if the inferior rating is from an investor-paid rating agency. Furthermore, the relative credibility of investor-paid ratings over issuer-paid ratings is asymmetric and largely applicable to inferior ratings.