Mandated public dissemination of over-the-counter transactions in corporate debt securities via the TRACE system dramatically reduces the average short-term market reaction to rating downgrades by both issuer-paid and investor-paid rating agencies. Ratings become relatively more accurate predictors of default and more sensitive to innovations in credit spreads after the introduction of dissemination. However, in transparent markets, they provide no significant information about future defaults beyond that provided by credit spreads. Dissemination increases the efficiency of information aggregation and transmission in bond markets, thereby reducing the incremental information content of ratings and the price impact of rating revisions.

This article examines the relationship between a mortgage originator's affiliation with the sponsor of a securitization or the servicer of the securitized loans and the default rate on the securitized mortgages. We find that default rates are significantly lower for securitizations in which the originator is affiliated with the sponsor or servicer. Consistent with investors expecting performance to vary with affiliation, we find that the initial yields on mortgage-backed securities (MBS) are lower and the percentage of AAA-rated securities issued against the securitized pool of loans is higher when the originator is affiliated with either the sponsor or servicer.

Debt; Bank loans