The Content of Credit Rating Reports

Abstract

We examine the readability, length, numerical content, uncertainty, and uniqueness of Moody’s rating reports. We analyze which factors affect the content of ratings in the cross-section and how regulatory events influence these measures over time. Rating content depends on analyst fixed effects, firm size, rating levels and rating bias. Moreover, rating report length significantly dropped after the Credit Rating Reform Act (2006), but readability and report length significantly improved after Dodd-Frank (2010). Greater readability and more unique ratings lead to lower announcement returns following downgrades, providing evidence that the content of rating reports plays a significant role for investors.

Keywords: Credit ratings, Regulation, Credit Rating Reform Act, Dodd-Frank Act, Financial crisis, Textual analysis

JEL Classification: G01, G14, G24, G28