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Do investors care about credit ratings? An analysis through the cycle

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  • Iannotta, Giuliano
  • Nocera, Giacomo
  • Resti, Andrea

Abstract

We investigate how the credit cycle affects the link between bond spreads and credit ratings. Using a simple model of the credit assessment process, we show that when the debt market is more opaque, the information content of ratings deteriorates, creating an incentive for investors to increase the amount spent on private information. We test this hypothesis empirically. Results show that when market opaqueness (proxied by the spread between Aaa- and Baa-rated bonds) increases, the explanatory power of ratings and other control variables deteriorates as investors increasingly price in non-public information.

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  • Iannotta, Giuliano & Nocera, Giacomo & Resti, Andrea, 2013. "Do investors care about credit ratings? An analysis through the cycle," Journal of Financial Stability, Elsevier, vol. 9(4), pages 545-555.
    • Handle: RePEc:eee:finsta:v:9:y:2013:i:4:p:545-555
    DOI: 10.1016/j.jfs.2012.11.006
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    11. G. Marandola & R. Mossucca, 2016. "When did the stock market start to react less to downgrades by Moody’s, S&P and Fitch?," Working Papers wp1066, Dipartimento Scienze Economiche, Universita' di Bologna.
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    More about this item

    Keywords

    Bond; Credit spread; Rating; Opaqueness;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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