Are bond ratings informative? Evidence from regulatory regime changes

Author

Louis H. EDERINGTON, University of Oklahoma
Jeremy GOH, Singapore Management UniversityFollow
Yen Teik LEE, Curtin University, Singapore
Lisa YANG, Montana State University - Bozeman

Publication Type

Working Paper

Version

submittedVersion

Publication Date

5-2018

Abstract

The recent Dodd-Frank Act (Section 939B) enacted in 2010 repeals credit rating agencies’ (CRAs) exemption from Regulation Fair Disclosure. We test whether CRAs continue to provide new information to the market after the repeal. We find that the significant pre-repeal stock price responses to rating changes disappear after the regime change. Bond price reactions however remain significant. These results are even more significant at the investment-speculative boundary. Our evidence suggests that CRAs serve as a conduit for transmitting private information before the repeal. It also shows that regulatory constraint is a channel by which credit ratings affect cost of financing.

Keywords

Credit Ratings, Market Reactions, Rating-Contingent Regulation, Regulation Fair Disclosure, Dodd-Frank Act, Section 939B

Discipline

Corporate Finance | Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

First Page

1

Last Page

33

Citation

EDERINGTON, Louis H.; GOH, Jeremy; LEE, Yen Teik; and YANG, Lisa. Are bond ratings informative? Evidence from regulatory regime changes. (2018). 1-33.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/5921

Copyright Owner and License

Authors

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.

Comments

Published in Journal of Fixed Income, 2019, 29 (1), 6-13. https://doi.org/10.3905/jfi.2019.29.1.006

Additional URL

https://ssrn.com/abstract=3216175