Regulation, Asset Complexity, and the Informativeness of Credit Ratings
55 Pages Posted: 19 Nov 2015 Last revised: 11 Nov 2021
Date Written: November 11, 2021
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
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