Unintended Consequences of the Dodd-Frank Act on Credit Rating Risk and Corporate Finance

Journal of Financial and Quantitative Analysis, Forthcoming

58 Pages Posted: 5 Nov 2018 Last revised: 16 Apr 2021

See all articles by Bina Sharma

Bina Sharma

University of Texas Rio Grande Valley

Binay Adhikari

University of Texas at San Antonio

Anup Agrawal

University of Alabama - Culverhouse College of Commerce & Business Administration

Bruno R. Arthur

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American)

Monika K. Rabarison

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American)

Date Written: April 8, 2021

Abstract

Prior research finds that Dodd-Frank Act’s regulations on credit rating agencies (CRAs) increase rated firms’ risk of rating downgrades, regardless of their credit quality (see Dimitrov, Palia and Tang (2015)). Our difference-in-differences estimates suggest that after Dodd-Frank, low-rated firms, which face steep costs from a further downgrade, significantly reduce their debt issuance and investments compared to similar unrated firms. Our results are not driven by credit supply or the financial crisis. They reveal an unintended consequence of Dodd-Frank: Greater regulatory pressure on CRAs leads to negative spillover effects on firms concerned about credit ratings, regardless of their credit quality.

Keywords: Dodd-Frank Act, Credit Rating, Financing, Investment

JEL Classification: G32, G31, G38, G23

Suggested Citation

Sharma, Bina and Adhikari, Binay Kumar and Agrawal, Anup and Arthur, Bruno R. and Rabarison, Monika, Unintended Consequences of the Dodd-Frank Act on Credit Rating Risk and Corporate Finance (April 8, 2021). Journal of Financial and Quantitative Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3276309 or http://dx.doi.org/10.2139/ssrn.3276309

Bina Sharma

University of Texas Rio Grande Valley ( email )

1201 W. University Dr.
Edinburg, TX 78539
United States

Binay Kumar Adhikari

University of Texas at San Antonio ( email )

1 UTSA Circle
San Antonio, TX 78249
United States
2104585349 (Phone)

Anup Agrawal (Contact Author)

University of Alabama - Culverhouse College of Commerce & Business Administration ( email )

Culverhouse College of Business
EFLS, Box 870224
Tuscaloosa, AL 35487-0224
United States
205-348-8970 (Phone)
205-348-0590 (Fax)

HOME PAGE: http://aagrawal.people.ua.edu/

Bruno R. Arthur

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) ( email )

1201 W. University Dr.
Edinburg, TX 78539
United States

HOME PAGE: http://www.utrgv.edu

Monika Rabarison

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) ( email )

1201 W. University Dr.
Edinburg, TX 78539
United States

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