When firms are forced to publicly disclose financial information, credit rating agencies are generally expected to improve their risk assessments. Theory predicts such an information quality effect but also suggests an adverse reputational concerns effect since credit analysts may become increasingly concerned about alleged rating failures. We empirically examine these predictions using a large-scale quasi-natural experiment in Germany, where a new compliance regime required firms to disclose annual financial statements publicly. Consistent with the reputational concerns hypothesis, we find an average increase in credit rating downgrades that is entirely driven by changes in the discretionary assessments of credit analysts rather than changes in firm fundamentals. Following public disclosure regulations, analysts tend to give positive private information less weight in their risk assessments while assigning greater weight to negative public information. A final set of results indicates that professional credit providers recognize that the resulting downgrades are not warranted.

Abstract Research and development tax credits often aim to increase investment in experimentation, hoping that firms invent fundamentally new technologies that in turn generate positive spillovers. Since most policies require that companies make profits in order to claim credits, they might also shift investments towards less risky refinement and exploitation. Following the availability of credits, we demonstrate that firms do not experiment but deepen invention in areas of extant expertise. We observe stronger shifts for firms operating in uncertain markets where search failures are more likely to reduce credit eligibility.