Credit Ratings and the Cost of Municipal Financing

63 Pages Posted: 1 Aug 2013 Last revised: 1 May 2017

Jess Cornaggia

Pennsylvania State University - Department of Finance

Kimberly Rodgers Cornaggia

Pennsylvania State University - Department of Finance

Ryan D. Israelsen

Indiana University - Kelley School of Business - Department of Finance

Date Written: April 30, 2017

Abstract

A common belief held among researchers and policymakers is that regulatory reliance has inflated market demand for credit ratings, despite ratings’ decreasing informational value. Advances in information technology, coupled with reputation losses following the subprime crisis, renew the question of whether investors still rely on ratings to assess credit risk. Moody’s 2010 municipal rating scale recalibration, which was unrelated to changing issuer fundamentals, reveals that ratings still matter to investors and to issuers – apart from any regulatory implications. Our results commend improved disclosure to mitigate mechanistic reliance on ratings and inefficiencies due to rating standards that vary across asset classes.

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

JEL Classification: G24, G28

Suggested Citation

Cornaggia, Jess and Cornaggia, Kimberly Rodgers and Israelsen, Ryan D., Credit Ratings and the Cost of Municipal Financing (April 30, 2017). Available at SSRN: https://ssrn.com/abstract=2304373 or http://dx.doi.org/10.2139/ssrn.2304373

Jess Cornaggia (Contact Author)

Pennsylvania State University - Department of Finance ( email )

University Park, PA 16802
United States

HOME PAGE: http://jesscornaggia.com

Kimberly Rodgers Cornaggia

Pennsylvania State University - Department of Finance ( email )

306 Business Bldg
University Park, PA 16802
United States
814-865-2243 (Phone)
814-865-3362 (Fax)

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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