Unveiling Rating Bias Through Synthetic Controls: The Case of Moody’s and Berkshire

This paper examines whether Moody’s 2000 IPO compromised its independence as a credit rating agency. Using synthetic controls, we construct a counterfactual rating trajectory for Berkshire Hathaway-affiliated firms — Moody’s largest post-IPO shareholder — and compare it to actual ratings. Results show significant rating inflation for these firms, peaking at nearly two notches by 2005 and fading thereafter. This effect exceeds prior difference-in-differences estimates. Placebo and robustness tests affirm significance. Findings underscore concentrated ownership’s influence in reputation-sensitive industries and highlight conflicts of interest in credit ratings. The study advances literature on rating inflation and shareholder activism by revealing how large shareholders can distort incentives and market information.