The Review of Corporate Finance Studies Vol. 12 No. 3 2023
Regulation, Asset Complexity, and the Informativeness of Credit Ratings
Abstract
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.
- DOI
- 10.1093/rcfs/cfac003
- Volume
- 12
- Issue
- 3
- Pages
- 581-612
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref