Impact of the Dodd-Frank Act on Credit Ratings

44 Pages Posted: 3 Jun 2014 Last revised: 26 Jun 2015

See all articles by Valentin Dimitrov

Valentin Dimitrov

Rutgers, The State University of New Jersey - Accounting & Information Systems

Darius Palia

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics; Columbia University - Law School

Leo Tang

Lehigh University

Date Written: April 2, 2014

Abstract

We analyze the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) on corporate bond ratings issued by credit rating agencies (CRAs). We find no evidence that Dodd-Frank disciplines CRAs to provide more accurate and informative credit ratings. Instead, following Dodd-Frank, CRAs issue lower ratings, give more false warnings, and issue downgrades that are less informative. These results are consistent with the reputation model of Morris (2001), and suggest that CRAs become more protective of their reputation following the passage of Dodd-Frank. Consistent with Morris (2001), we find that our results are stronger for industries with low Fitch market share, where Moody’s and Standard & Poor’s have stronger incentives to protect their reputation (Becker and Milbourn (2011)). Our results are not driven by business cycle effects or firm characteristics, and strengthen as the uncertainty regarding the passage of Dodd-Frank gets resolved. We conclude that increasing the legal and regulatory costs to CRAs might have an adverse effect on the quality of credit ratings.

Keywords: Dodd-Frank, Reputation, Credit Ratings, Information

JEL Classification: G14; G28

Suggested Citation

Dimitrov, Valentin and Palia, Darius and Tang, Leo, Impact of the Dodd-Frank Act on Credit Ratings (April 2, 2014). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2444990

Valentin Dimitrov

Rutgers, The State University of New Jersey - Accounting & Information Systems ( email )

1 Washington Park
Newark, NJ 07102
United States

Darius Palia

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics ( email )

111 Washington Street
MEC 134
Newark, NJ 07102
United States
973-353-5981 (Phone)
973-353-1233 (Fax)

Columbia University - Law School ( email )

435 W 116th St.
New York, NY 10027
United States

Leo Tang (Contact Author)

Lehigh University ( email )

621 Taylor St
Bethlehem, PA 18015
United States

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