Credit Ratings and the Cost of Municipal Financing
Kimberly Rodgers Cornaggia
American University - Kogod School of Business
Ryan D. Israelsen
Indiana University - Kelley School of Business - Department of Finance
July 17, 2015
Moody’s recalibrated its municipal bond rating scale in 2010, upgrading $2.2 trillion of municipal debt. This event allows us to test whether investors rely on ratings to assess credit risk, free from confounding regulatory effects and changing fundamentals. We find the upgrades lowered credit spreads and expanded municipal debt capacity. These effects are stronger among more opaque issuers. We conclude that rating agencies will remain relevant despite legislators’ efforts to reduce regulatory reliance on ratings. Our results further commend improved disclosure to mitigate mechanistic reliance on ratings and inefficiencies due to rating standards that vary across asset classes.
Number of Pages in PDF File: 62
Keywords: Credit Ratings, NRSRO, Blind Reliance, Municipal Debt, Information Production, Capital Markets Regulation
JEL Classification: G24, G28
Date posted: August 1, 2013 ; Last revised: July 18, 2015
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