In recent years, the number of downgrades in corporate bond ratings has exceeded the number of upgrades, leading some to conclude that the credit quality of U.S. corporate debt has declined. However, an alternative explanation of this apparent decline in credit quality is that the rating agencies are now using more stringent standards in assigning ratings. An ordered probit analysis of a panel of firms from 1978 through 1995 suggests that rating standards have indeed become more stringent, implying that at least part of the downward trend in ratings is the result of changing standards. BOND RATINGS PLAY A KEY ROLE in corporate financing and investment decisions. A corporation that can issue higher rated bonds usually receives better terms than one that can issue only lower rated bonds. By law or policy, some investors can purchase only bonds with an investment-grade rating, a restriction which in some asset pricing models would affect the relative prices of financial assets.Numerous articles in the popular press have presumed that the credit quality of the debt of U.S. corporations has been declining over the last couple of decades. The comprehensive study by Lucas and Lonski~1992! of Moody's rating changes of corporate debt is consistent with this presumption. To cite their statistics, in 1970 Moody's downgraded 21 issues and upgraded 23 issues, but over the following years the number of bonds downgraded began to exceed by substantial margins the number of bonds upgraded, and by 1990 Moody's downgraded 301 issues and upgraded only 61. Their study includes both investment and noninvestment grade bonds, but internal data from Donaldson Lufkin & Jenrette confirm that this trend also applies to investment grade bonds alone. In a somewhat different context, Grundy~1997! documents similar trends in the ratings of preferred shares over the 1965 to 1990 period.As the credit quality of a firm's corporate debt decreases, that firm will face a greater probability of financial distress, which at the extreme translates into bankruptcy. There is some debate as to the effect of financial dis-

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