The Information Content of Credit Ratings: The Impact of Financial Scandals and Regulation

48 Pages Posted: 25 Apr 2013 Last revised: 6 Oct 2021

See all articles by Ginevra Marandola

Ginevra Marandola

European Commission, Joint Research Centre; University of Bologna - School of Economics, Management, and Statistics; European Commission-Joint Research Centre

Rossella Mossucca

Einaudi Institute for Economics and Finance (EIEF)

Date Written: June 25, 2013

Abstract

In this paper we assess the relevance of information that credit ratings by Moody’s, S&P’s and Fitch convey to investors in light of financial scandals and reforms affecting the rating business. On a sample of downgrades issued on US corporate bonds by the three agencies from 1998 to 2011, we provide evidence that stock market response to rating actions has persistently decreased over time. To the extent that the market response to rating changes reflects investors' esteem of the information conveyed by ratings, we conclude that ratings have lost their ability to reduce the asymmetry of information between issuers and investors. This leaves us with one possible explanation for the persistence of the “big three” market power: regulatory distortions and weak reforms have reinforced the agencies dominance by institutionalizing their ratings, which represent now an established and customized standard in private contracts and among debt issuers.

Keywords: credit rating agencies, event study, information acquisition, financial regulation, stock market

JEL Classification: G24, G28, G14, G18

Suggested Citation

Marandola, Ginevra and Mossucca, Rossella, The Information Content of Credit Ratings: The Impact of Financial Scandals and Regulation (June 25, 2013). Available at SSRN: https://ssrn.com/abstract=2255777 or http://dx.doi.org/10.2139/ssrn.2255777

Ginevra Marandola (Contact Author)

European Commission, Joint Research Centre ( email )

Brussels
Belgium
3287433987 (Phone)

University of Bologna - School of Economics, Management, and Statistics ( email )

Piazza Scaravilli 1
40126 Bologna, fc 47100
Italy

European Commission-Joint Research Centre

Belgium

Rossella Mossucca

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

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