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
Date Written: April 8, 2021
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: Suggested Citation