The Effect of Credit Ratings on Disclosure: Evidence from the Recalibration of Moody’s Municipal Ratings

66 Pages Posted: 16 Apr 2018 Last revised: 10 Apr 2020

See all articles by Jacquelyn Gillette

Jacquelyn Gillette

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Delphine Samuels

University of Chicago -- Booth School of Business

Frank Zhou

University of Pennsylvania - The Wharton School

Date Written: July 24, 2019

Abstract

This paper examines how credit rating levels affect municipal debt issuers’ disclosure decisions. Using exogenous upgrades in credit rating levels caused by the recalibration of Moody’s municipal ratings scale in 2010, we find that upgraded municipalities significantly reduce their disclosure of required continuing financial information, relative to unaffected municipalities. Consistent with a reduction in debtholders’ demand for information driving these results, the reduction in disclosure is greater when municipal bonds are held by investors who relied more on disclosure ex ante. However, we also find that the reduction in disclosure does not manifest when issuers are monitored by underwriters with greater issuer-specific expertise and when issuers are subject to direct regulatory enforcement through the receipt of federal funding. Overall, our results suggest that higher credit rating levels lower investor demand for disclosure in the municipal market, and highlight the role of underwriters and direct regulatory enforcement in maintaining disclosure levels when investor demand is low.

Keywords: Municipal Bonds, Municipal Disclosure, Credit Ratings, Moody’s Recalibration, Underwriters, Single Audit Act

JEL Classification: M40, M41, G24, G28, H74

Suggested Citation

Gillette, Jacquelyn and Samuels, Delphine and Zhou, Frank, The Effect of Credit Ratings on Disclosure: Evidence from the Recalibration of Moody’s Municipal Ratings (July 24, 2019). Available at SSRN: https://ssrn.com/abstract=3153143 or http://dx.doi.org/10.2139/ssrn.3153143

Jacquelyn Gillette (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Ave. E62-663
Cambridge, MA 02142
United States

Delphine Samuels

University of Chicago -- Booth School of Business ( email )

1101 East 58th Street
Chicago, IL 60637-1561
United States

Frank Zhou

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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