Regulation, asset complexity, and the informativeness of credit ratings
We show that the effect of regulation on credit rating informativeness depends on asset complexity. Using the Dodd-Frank Act as a shock to the rating industry, we analyze the impact of rating changes on market prices, conditioning on various measures of complexity. Rating informativeness improves af...
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| Other Authors: | , |
| Format: | article |
| Language: | eng |
| Published: |
2022
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| Online Access: | http://hdl.handle.net/10362/133750 |
| Country: | Portugal |
| Oai: | oai:run.unl.pt:10362/133750 |
| Summary: | We show that the effect of regulation on credit rating informativeness depends on asset complexity. Using the Dodd-Frank Act as a shock to the rating industry, we analyze the impact of rating changes on market prices, conditioning on various measures of complexity. Rating informativeness improves after Dodd-Frank, but not for assets with high complexity. Our results are robust to alternative measures of informativeness and provide strong evidence that the impact of regulation varies in the cross-section of securities. Our findings are consistent with models combining rating shopping with rating agencies that strategically decide on information acquisition and rating inflation. |
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