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
March 27, 2014
Moody’s recalibrated its municipal bond rating scale in 2010, resulting in upgrades of zero to four notches on $2.2 trillion of bonds. We find the upgraded bonds earn abnormal returns, increasing in upgrade magnitude. Upgraded municipalities subsequently issue more bonds, relative to non-upgraded municipalities, and the new issues have lower relative offer yields. Additional tests indicate that ratings affect bond prices and debt capacity both because ratings provide information and because higher ratings reduce regulatory compliance costs. Overall, this recalibration event sheds light on the information environment in the municipal bond market and on the real effects of ratings.
Number of Pages in PDF File: 61
Keywords: Credit Ratings, NRSRO, Municipal Debt, Information Production, Capital Markets Regulation
JEL Classification: G24, G28
Date posted: August 1, 2013 ; Last revised: July 29, 2014
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