Do Credit Ratings Still Matter? Evidence from the Municipal Bond Market
Kimberly Rodgers Cornaggia
American University - Kogod School of Business
Ryan D. Israelsen
Indiana University Bloomington - Department of Finance
November 1, 2013
We find robust evidence that the market re-priced the debt of municipalities that were recalibrated to the less stringent rating standards faced by other asset classes. This recalibration event offers a unique opportunity to measure the price impact of credit ratings free from the confounding effects of changing issuer fundamentals. The evidence suggests that the price impact of Moody’s ratings reflects both a role for Moody’s as an information provider to this market and trading by regulated institutions mitigating capital requirements and other compliance costs. Because the market still prices Moody’s information, we conclude that this recalibration should lower financing costs faced by municipalities toward those faced by corporations and issuers of structured finance products with comparable default risk.
Number of Pages in PDF File: 36
Keywords: Credit Ratings, NRSRO, Municipal Debt, Information Production, Capital Markets Regulation
JEL Classification: G24, G28working papers series
Date posted: August 1, 2013 ; Last revised: November 2, 2013
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