Does SEC Certification Affect the Information Content of Credit Ratings?

Abstract:     
We exploit the SEC certification of an investor-paid credit rating agency to disentangle competing effects on the information content of credit ratings due to rater compensation structure and the potential regulatory demand associated with certification. We use a certified issuer-paid agency as a benchmark and find robust evidence that the investor-paid agency’s ratings policy – both timelier and more symmetric with respect to positive and negative information – persists after it became certified for regulatory compliance. Our results suggest that ratings policy is primarily a function of compensation structure and provide a more nuanced understanding of the SEC certification.

Number of Pages in PDF File: 43

Keywords: Credit Ratings, NRSRO, Capital Markets Regulation, Certification

JEL Classification: G24, G28

working papers series