The Relevance of Credit Ratings in Transparent Bond Markets

46 Pages Posted: 18 Mar 2017 Last revised: 9 Dec 2017

See all articles by Dominique C. Badoer

Dominique C. Badoer

University of Illinois at Chicago - Department of Finance

Cem Demiroglu

Koc University, College of Administrative Sciences and Economics

Date Written: December 8, 2017

Abstract

We find that mandated public dissemination of over-the-counter transactions in corporate debt securities via the TRACE system dramatically reduces the average short-term market reaction to rating downgrades by both issuer-paid and investor-paid rating agencies. The effect of dissemination is greatest where there is greater uncertainty about credit risk. After dissemination, ratings become more accurate predictors of default and more sensitive to innovations in credit spreads. Both before and after dissemination, ratings provide no incremental credit risk information relative to credit spreads. These results suggest that the dissemination of over-the-counter trades fills information gaps and reduces reliance on credit ratings.

Keywords: credit ratings; over-the-counter markets; search costs; transparency; TRACE

JEL Classification: D83; G14; G24

Suggested Citation

Badoer, Dominique C. and Demiroglu, Cem, The Relevance of Credit Ratings in Transparent Bond Markets (December 8, 2017). Paris December 2017 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=2933327 or http://dx.doi.org/10.2139/ssrn.2933327

Dominique C. Badoer

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States

Cem Demiroglu (Contact Author)

Koc University, College of Administrative Sciences and Economics ( email )

Koc University
Sariyer
Istanbul, 34450
Turkey
90-212-338-1620 (Phone)
90-212-338-1653 (Fax)

HOME PAGE: http://https://sites.google.com/site/cemdemiroglu/

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