Abstract

http://ssrn.com/abstract=2304373
 
 

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Credit Ratings and the Cost of Municipal Financing


Jess Cornaggia


Georgetown University

Kimberly Rodgers Cornaggia


American University - Kogod School of Business

Ryan D. Israelsen


Indiana University - Kelley School of Business - Department of Finance

May 5, 2015


Abstract:     
Moody’s recalibrated its municipal bond rating scale in 2010, resulting in thousands of upgrades unrelated to changes in issuer credit quality. This event provides a clean test of whether investors rely mechanistically on credit ratings. We find that upgraded bonds earn excess returns and that higher ratings expand municipal debt capacity. Our results reflect investors’ reliance on CRAs to assess credit risk rather than a change in demand for upgraded securities due to ratings-based regulation. We conclude that market reliance on ratings has real economic effects and will not be eliminated by eliminating the use of credit ratings in regulation.

Number of Pages in PDF File: 61

Keywords: Credit Ratings, NRSRO, Blind Reliance, Municipal Debt, Information Production, Capital Markets Regulation

JEL Classification: G24, G28


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Date posted: August 1, 2013 ; Last revised: May 6, 2015

Suggested Citation

Cornaggia, Jess and Cornaggia, Kimberly Rodgers and Israelsen, Ryan D., Credit Ratings and the Cost of Municipal Financing (May 5, 2015). Available at SSRN: http://ssrn.com/abstract=2304373 or http://dx.doi.org/10.2139/ssrn.2304373

Contact Information

Jess Cornaggia (Contact Author)
Georgetown University ( email )
3700 O Street, NW
Washington, DC 20057
United States
HOME PAGE: http://www.jesscornaggia.com
Kimberly Rodgers Cornaggia
American University - Kogod School of Business ( email )
4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States
Ryan D. Israelsen
Indiana University - Kelley School of Business - Department of Finance ( email )
1309 E. 10th St.
Bloomington, IN 47405
United States

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