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

Author

Listed:
  • Giuliano Iannotta
  • Giacomo Nocera

    (Audencia Recherche - Audencia Business School)

  • Andrea Resti

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.

Suggested Citation

  • Giuliano Iannotta & Giacomo Nocera & Andrea Resti, 2013. "Do investors care about credit ratings? An analysis through the cycle," Post-Print hal-00840576, HAL.
    • Handle: RePEc:hal:journl:hal-00840576
    DOI: 10.1016/j.jfs.2012.11.006
    as

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