Did Government Regulations Lead to Inflated Credit Ratings?

Management Science 64(3), 1034-1054, 2018

55 Pages Posted: 23 Mar 2014 Last revised: 5 Nov 2018

See all articles by Patrick Behr

Patrick Behr

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE)

Darren J. Kisgen

Boston College - Carroll School of Management

Jérôme Taillard

Babson College

Date Written: July 27, 2016

Abstract

SEC regulations in 1975 gave select rating agencies increased market power by increasing both barriers to entry and the reliance on ratings for regulations. We test whether these regulations led to ratings inflation. We find that defaults and negative financial changes are more likely for firms given the same rating if the rating was assigned after the SEC action. Further, firms initially rated Baa post-regulations are 19% more likely to be negatively downgraded to speculative grade than firms rated Baa pre-regulations. These results indicate that the market power derived from the SEC led to ratings inflation.

Keywords: Credit ratings, SEC, Default risk, NRSROs, Capital markets regulation, Regulatory licensing

JEL Classification: G18, G24, G28, G32

Suggested Citation

Behr, Patrick and Kisgen, Darren J. and Taillard, Jérôme, Did Government Regulations Lead to Inflated Credit Ratings? (July 27, 2016). Management Science 64(3), 1034-1054, 2018. Available at SSRN: https://ssrn.com/abstract=2412294 or http://dx.doi.org/10.2139/ssrn.2412294

Patrick Behr

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE) ( email )

Brazil

Darren J. Kisgen (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Jérôme Taillard

Babson College ( email )

Babson Park, MA 02457-0310
United States
781-239-6451 (Phone)

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