Are bond ratings informative? Evidence from regulatory regime changes

• 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
• Institution: Singapore Management University

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.