Market responses to increased transparency: An Indian narrative

Using the 2010 Transparency and Disclosure norms in India as a discontinuity in the institutional regime within which credit rating agencies operated, we use a difference-in-difference estimator to study how the market reacts to rating changes when regulatory norms require a higher level of transparency. Using data on the market and bank-based instruments from India we show that the market places greater premiums when ratings are generated in a regime with greater transparency and disclosure requirements. We find that the results are driven mostly by downgrades in ratings rather than upgrades, suggesting that the market responds more aggressively to downgrades. Transparency norms for credit rating agencies is an important governance feature even in emerging country credit markets.