The Value of Uninformative Credit Ratings
38 Pages Posted: 27 Oct 2015
Date Written: October 27, 2015
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: Suggested Citation