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The Value of Uninformative Credit Ratings

38 Pages Posted: 27 Oct 2015  

Jess Cornaggia

Pennsylvania State University - Department of Finance

Kimberly Rodgers Cornaggia

Pennsylvania State University - Department of Finance

Timothy T. Simin

Pennsylvania State University

Date Written: October 27, 2015

Abstract

We test the hypothesis that financial institutions and other regulated institutional investors benefit from relatively uninformative credit ratings. Using credit ratings without regulatory implications as a benchmark, we show that Moody’s certifies riskier bonds as investment grade. This arbitrary line affects regulated investors’ reserve requirements. We argue that Moody’s certification of marginal bonds allows regulated investors to mitigate the regulatory costs associated with yield chasing. This evidence supports an efficient market explanation – mitigating the costs of regulatory compliance – for the well-documented evidence that Moody’s credit ratings are less informative than those produced by smaller rating agencies.

Keywords: Corporate Debt, Credit Ratings, NRSROs, Information Intermediary, Capital Markets Regulation

JEL Classification: G14, G24, G28, G32

Suggested Citation

Cornaggia, Jess and Cornaggia, Kimberly Rodgers and Simin, Timothy T., The Value of Uninformative Credit Ratings (October 27, 2015). Available at SSRN: https://ssrn.com/abstract=2681374 or http://dx.doi.org/10.2139/ssrn.2681374

Jess Cornaggia

Pennsylvania State University - Department of Finance ( email )

University Park, PA 16802
United States

HOME PAGE: http://jesscornaggia.com

Kimberly Cornaggia (Contact Author)

Pennsylvania State University - Department of Finance ( email )

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

Timothy Simin

Pennsylvania State University ( email )

University Park, PA 16802
United States
814-865-3457 (Phone)

HOME PAGE: http://timsimin.net

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