Regulation, Asset Complexity, and the Informativeness of Credit Ratings

55 Pages Posted: 19 Nov 2015 Last revised: 11 Nov 2021

See all articles by Rainer Jankowitsch

Rainer Jankowitsch

WU (Vienna University of Economics and Business); Vienna Graduate School of Finance (VGSF)

Giorgio Ottonello

Nova School of Business and Economics

Marti G. Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business

Date Written: November 11, 2021

Abstract

We show that the effect of regulation on credit rating informativeness depends on asset complexity. Using the Dodd-Frank Act as a shock to the rating industry, we analyze the impact of rating changes on market prices, conditioning on various measures of complexity. Rating informativeness improves after Dodd-Frank, but not for assets with high complexity. Our results are robust to alternative measures of informativeness and provide strong empirical evidence that the impact of regulation varies in the cross-section of securities. Our findings are consistent with models combining rating shopping with rating agencies strategically deciding on information acquisition and rating inflation.

Keywords: ratings, regulation, asset complexity, corporate bonds, information costs

JEL Classification: G01, G12, G24

Suggested Citation

Jankowitsch, Rainer and Ottonello, Giorgio and Subrahmanyam, Marti G., Regulation, Asset Complexity, and the Informativeness of Credit Ratings (November 11, 2021). Available at SSRN: https://ssrn.com/abstract=2655684

Rainer Jankowitsch (Contact Author)

WU (Vienna University of Economics and Business) ( email )

Welthandelsplatz 1
Vienna, Vienna AT1020
Austria
+43 1 31 336 4340 (Phone)
+43 1 310 0580 (Fax)

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Giorgio Ottonello

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

HOME PAGE: http://https://sites.google.com/view/gi8nello

Marti G. Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

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