Ederington, L., Goh, J., Teik Lee, Y., & (Zongfei) Yang, L. (2019). Are bond ratings informative? evidence from regulatory regime changes. The Journal of Fixed Income, 29(1), 6–19.
Yen Tiek Lee | ASB Faculty | Research Paper
The Dodd–Frank Act (Section 939B) enacted in 2010 repealed the exemption of credit rating agencies (CRAs) from Regulation Fair Disclosure. Testing whether CRAs continue to provide new information to the market after the repeal, the authors find that the significant prerepeal 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. Evidence suggests that CRAs served as a conduit for transmitting private information before the repeal and that the continued bond price reactions are likely due to regulations favoring higher-rated bonds.