The Information Content of Credit Ratings: The Impact of Financial Scandals and Regulation
48 Pages Posted: 25 Apr 2013 Last revised: 6 Oct 2021
Date Written: June 25, 2013
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
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