Are bond ratings informative? Evidence from regulatory regime changes

Are bond ratings informative? Evidence from regulatory regime changes

The recent Dodd-Frank Act (Section 939B) enacted in 2010 repeals credit rating agencies’ (CRAs) exemption from Regulation Fair Disclosure. We test whether CRAs continue to provide new information to the market after the repeal. We find that the significant pre-repeal stock price responses to rating...

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Bibliographic Details
Main Authors: EDERINGTON, Louis H., GOH, Jeremy, LEE, Yen Teik, YANG, Lisa
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2018
Subjects:
Credit Ratings
Market Reactions
Rating-Contingent Regulation
Regulation Fair Disclosure
Dodd-Frank Act
Section 939B
Corporate Finance
Finance and Financial Management
Portfolio and Security Analysis
Online Access:https://ink.library.smu.edu.sg/lkcsb_research/5921
https://ink.library.smu.edu.sg/context/lkcsb_research/article/6920/viewcontent/Are_Bond_Rating_Informative_2018_wp.pdf
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Institution: Singapore Management University
Language: English
Description
Summary:The recent Dodd-Frank Act (Section 939B) enacted in 2010 repeals credit rating agencies’ (CRAs) exemption from Regulation Fair Disclosure. We test whether CRAs continue to provide new information to the market after the repeal. We find that the significant pre-repeal stock price responses to rating changes disappear after the regime change. Bond price reactions however remain significant. These results are even more significant at the investment-speculative boundary. Our evidence suggests that CRAs serve as a conduit for transmitting private information before the repeal. It also shows that regulatory constraint is a channel by which credit ratings affect cost of financing.

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