Are bond ratings informative? Evidence from regulatory regime changes

• Main Authors: EDERINGTON, Louis H., GOH, Jeremy C., LEE, Yen Teik, YANG, Lisa Zongfei
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2019
• Subjects: Fixed income and structured finance; information providers/credit ratings; Finance and Financial Management; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/6437; https://ink.library.smu.edu.sg/context/lkcsb_research/article/7436/viewcontent/Are_bond_ratings_informative_sv.pdf
• Institution: Singapore Management University

The Dodd–Frank Act (Section 939B) enacted in 2010 repealed the exemption of credit rating agencies (CRAs) from Regulation Fair Disclosure. Testing whether CRAs continue to provide new information to the market after the repeal, the authors find that the significant prerepeal 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. Evidence suggests that CRAs served as a conduit for transmitting private information before the repeal and that the continued bond price reactions are likely due to regulations favoring higher-rated bonds.