IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v38y2021ics1544612319308608.html
   My bibliography  Save this article

Are investors fixated on credit ratings? Reinterpreting the municipal bond recalibration

Author

Listed:
  • Tang, Leo
  • Li, Pei

Abstract

Cornaggia et al. (2017) construe positive investor reactions to Moody's 2010 recalibration as evidence that credit ratings matter. However, the purpose of recalibration was officially discussed by Moody's as early as 2002. Furthermore, for most bonds, the implementation of recalibration presented limited information and followed an algorithm which was published prior to the implementation date. We interpret investor reactions on the implementation of recalibration as more consistent with evidence of investor fixation towards credit ratings.

Suggested Citation

  • Tang, Leo & Li, Pei, 2021. "Are investors fixated on credit ratings? Reinterpreting the municipal bond recalibration," Finance Research Letters, Elsevier, vol. 38(C).
    • Handle: RePEc:eee:finlet:v:38:y:2021:i:c:s1544612319308608
    DOI: 10.1016/j.frl.2020.101449
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544612319308608
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.frl.2020.101449?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Andreasen, Eugenia & Valenzuela, Patricio, 2016. "Financial openness, domestic financial development and credit ratings," Finance Research Letters, Elsevier, vol. 16(C), pages 11-18.
    2. Pei Li & Leo Tang & Bikki Jaggi, 2018. "Social Capital and the Municipal Bond Market," Journal of Business Ethics, Springer, vol. 153(2), pages 479-501, December.
    3. Hendrik Bessembinder & Kathleen M. Kahle & William F. Maxwell & Danielle Xu, 2009. "Measuring Abnormal Bond Performance," Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 4219-4258, October.
    4. Dimitrov, Valentin & Palia, Darius & Tang, Leo, 2015. "Impact of the Dodd-Frank act on credit ratings," Journal of Financial Economics, Elsevier, vol. 115(3), pages 505-520.
    5. Chang, Jung-Hsien & Hung, Mao-Wei & Tsai, Feng-Tse, 2015. "Credit contagion and competitive effects of bond rating downgrades along the supply chain," Finance Research Letters, Elsevier, vol. 15(C), pages 232-238.
    6. Chris Downing & Frank Zhang, 2004. "Trading Activity and Price Volatility in the Municipal Bond Market," Journal of Finance, American Finance Association, vol. 59(2), pages 899-931, April.
    7. Hastie, K. Larry, 1972. "Determinants of Municipal Bond Yields," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 7(3), pages 1729-1748, June.
    8. Vikram Nanda & Rajdeep Singh, 2004. "Bond Insurance: What Is Special About Munis?," Journal of Finance, American Finance Association, vol. 59(5), pages 2253-2280, October.
    9. Blackwell, David W. & Kidwell, David S., 1988. "An investigation of cost differences between public sales and private placements of debt," Journal of Financial Economics, Elsevier, vol. 22(2), pages 253-278, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Pei Li & Leo Tang & Bikki Jaggi, 2018. "Social Capital and the Municipal Bond Market," Journal of Business Ethics, Springer, vol. 153(2), pages 479-501, December.
    2. Jaspreet Kaur & Madhu Vij & Ajay Kumar Chauhan, 2023. "Signals influencing corporate credit ratings—a systematic literature review," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 50(1), pages 91-114, March.
    3. Christine R. Martell & Robert S. Kravchuk, 2010. "Bond Insurance and Liquidity Provision: Impacts in the Municipal Variable Rate Debt Market, 2008-09," Public Finance Review, , vol. 38(3), pages 378-401, May.
    4. Gao, Pengjie & Lee, Chang & Murphy, Dermot, 2020. "Financing dies in darkness? The impact of newspaper closures on public finance," Journal of Financial Economics, Elsevier, vol. 135(2), pages 445-467.
    5. Wang, Junbo & Wu, Chunchi, 2015. "Liquidity, credit quality, and the relation between volatility and trading activity: Evidence from the corporate bond market," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 183-203.
    6. Gao, Pengjie & Lee, Chang & Murphy, Dermot, 2019. "Municipal borrowing costs and state policies for distressed municipalities," Journal of Financial Economics, Elsevier, vol. 132(2), pages 404-426.
    7. Francis A. Longstaff, 2009. "Municipal Debt and Marginal Tax Rates: Is there a Tax Premium in Asset Prices?," NBER Working Papers 14687, National Bureau of Economic Research, Inc.
    8. Xiaolu Hu & Haoyi Luo & Zijin Xu & Jiang Li, 2021. "Intra‐industry spill‐over effect of default: Evidence from the Chinese bond market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 4703-4740, September.
    9. deHaan, Ed & Li, Jiacui & Watts, Edward M., 2023. "Retail bond investors and credit ratings," Journal of Accounting and Economics, Elsevier, vol. 76(1).
    10. McConnell, John J. & Saretto, Alessio, 2010. "Auction failures and the market for auction rate securities," Journal of Financial Economics, Elsevier, vol. 97(3), pages 451-469, September.
    11. Brune, Chris & Liu, Pu, 2011. "The contagion effect of default risk insurer downgrades: The impact on insured municipal bonds," Journal of Economics and Business, Elsevier, vol. 63(5), pages 492-502, September.
    12. Kenneth A. Kriz & Yan Xiao, 2017. "The Impact of Rating Recalibration on Municipal Bond Yield Spreads," Public Budgeting & Finance, Wiley Blackwell, vol. 37(2), pages 83-101, June.
    13. Brogaard, Jonathan & Koski, Jennifer L. & Siegel, Andrew F., 2019. "Do upgrades matter? Evidence from trading volume," Journal of Financial Markets, Elsevier, vol. 43(C), pages 54-77.
    14. Cornaggia, Kimberly & Hund, John & Nguyen, Giang, 2022. "Investor attention and municipal bond returns," Journal of Financial Markets, Elsevier, vol. 60(C).
    15. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1993. "The Choice Between Public and Private Debt: An Analysis of Post-Deregulation Corporate Financing in Japan," NBER Working Papers 4421, National Bureau of Economic Research, Inc.
    16. Vink, Dennis & Nawas, Mike & van Breemen, Vivian, 2021. "Security design and credit rating risk in the CLO market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    17. Lekniūtė, Zina & Beetsma, Roel & Ponds, Eduard, 2019. "U.S. municipal yields and unfunded state pension liabilities," Journal of Empirical Finance, Elsevier, vol. 53(C), pages 15-32.
    18. Erwan Morellec & Philip Valta & Alexei Zhdanov, 2015. "Financing Investment: The Choice Between Bonds and Bank Loans," Management Science, INFORMS, vol. 61(11), pages 2580-2602, November.
    19. Zadeh, Mohammad Hendijani, 2023. "Stock liquidity and societal trust," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).
    20. repec:hal:spmain:info:hdl:2441/293qice3lj861rvos9ns14n0h0 is not listed on IDEAS
    21. Roque B. Fernández & Sergio Pernice & Jorge M. Streb, 2007. "Determinants of the development of corporate bond markets in Argentina: One size does not fit all," CEMA Working Papers: Serie Documentos de Trabajo. 348, Universidad del CEMA.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:38:y:2021:i:c:s1544612319308608. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.