The Game Changer: Regulatory Reform and Multiple Credit Ratings
35 Pages Posted: 16 Aug 2021
Date Written: June 2021
This paper examines the change in the regulatory use of multiple credit ratings after the Dodd-Frank Act (Dodd-Frank). We find that post Dodd-Frank reform, firms are less likely to demand a third rating (typically from Fitch) for ratings near the high yield (HY) - investment grade (IG) boundary to support their new corporate bond issues. Third ratings also become less informative post Dodd-Frank, with a much weaker market impact on credit spreads for firms with S&P and Moody’s ratings on opposite sides of the HY-IG rating boundary. We provide new evidence on the effect of Dodd-Frank in curbing corporate borrowers’ strategic use of multiple credit ratings near this boundary.
Keywords: Financial regulation, Dodd-Frank, credit ratings, corporate bonds
JEL Classification: G01, G24, G28
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