Abstract
As part of its divestiture agreement, AT&T was required to spin off its local exchange companies (LECs). Confronted with the task of devising ratings for the newly independent companies, Moody's and S&P published new ratings that conflicted for all 21 LECs. This study reveals that the S&P rating decision can largely be explained using a small set of historical financial variables, but these variables are not successful in explaining Moody's ratings. In addition, an examination of LEC bond returns shows that the rating-change announcements did not produce significant abnormal returns on or around the announcement dates. Apparently, most of this information had already been assimilated in bond-market prices.
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