The Regulatory Role of Credit Ratings and Voluntary Disclosure

57 Pages Posted: 3 Mar 2020

See all articles by Riddha Basu

Riddha Basu

George Washington University - School of Business; Northwestern University - Department of Accounting Information & Management

James P. Naughton

University of Virginia, Darden School of Business

Clare Wang

University of Colorado at Boulder - Leeds School of Business

Date Written: January 4, 2020

Abstract

We provide evidence suggesting that corporate credit rating changes have an effect on firms’ voluntary disclosure behavior that is independent of the information they convey about firm fundamentals. Our analyses exploit two separate quasi-experimental settings that generate either exogenous credit rating downgrades or credit rating upgrades (i.e., credit rating label changes). We find evidence of a negative relation between the direction of the credit rating label change and the provision of voluntary disclosure in both settings — firms respond to exogenous downgrades by increasing voluntary disclosure and to exogenous upgrades by decreasing voluntary disclosure. The effects we document are independent of the information role of credit ratings, and are instead attributable to the regulatory role of credit ratings. Overall, our analyses indicate that credit rating agencies as gatekeepers influence firms’ provision of voluntary disclosure.

Keywords: Credit ratings, voluntary disclosure, information intermediaries

JEL Classification: G15, G18, M41

Suggested Citation

Basu, Riddha and Naughton, James P. and Wang, Clare, The Regulatory Role of Credit Ratings and Voluntary Disclosure (January 4, 2020). Available at SSRN: https://ssrn.com/abstract=3532030 or http://dx.doi.org/10.2139/ssrn.3532030

Riddha Basu

George Washington University - School of Business ( email )

Washington, DC 20052
United States

Northwestern University - Department of Accounting Information & Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

James P. Naughton (Contact Author)

University of Virginia, Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Clare Wang

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

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