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Impact of the Dodd-Frank act on credit ratings

Author

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  • Dimitrov, Valentin
  • Palia, Darius
  • Tang, Leo

Abstract

We analyze the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) on corporate bond ratings issued by credit rating agencies (CRAs). We find no evidence that Dodd-Frank disciplines CRAs to provide more accurate and informative credit ratings. Instead, following Dodd-Frank, CRAs issue lower ratings, give more false warnings, and issue downgrades that are less informative. These results are consistent with the reputation model of Morris (2001), and suggest that CRAs become more protective of their reputation following the passage of Dodd-Frank. Consistent with Morris (2001), we find that our results are stronger for industries with low Fitch market share, where Moody׳s and Standard & Poor׳s have stronger incentives to protect their reputation (Becker and Milbourn, 2011). Our results are not driven by business cycle effects or firm characteristics, and strengthen as the uncertainty regarding the passage of Dodd-Frank gets resolved. We conclude that increasing the legal and regulatory costs to CRAs might have an adverse effect on the quality of credit ratings.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:jfinec:v:115:y:2015:i:3:p:505-520
    DOI: 10.1016/j.jfineco.2014.10.012
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Dodd-Frank: Five Years After
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2015-06-15 17:30:40
    2. Dodd-Frank: Five Years After
      by Stephen G. Cecchetti in Huffington Post Business on 2015-07-05 12:57:50
    3. Dodd-Frank: Five Years After
      by Stephen G. Cecchetti in Huffington Post Business on 2015-07-05 16:57:50

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    Cited by:

    1. repec:eee:jeborg:v:144:y:2017:i:c:p:78-86 is not listed on IDEAS
    2. Bereskin, Frederick L. & Kim, Bushik & Oh, Frederick Dongchuhl, 2015. "Do credit rating concerns lead to better corporate governance? Evidence from Korea," Pacific-Basin Finance Journal, Elsevier, vol. 35(PB), pages 592-608.
    3. repec:eee:finsta:v:34:y:2018:i:c:p:44-60 is not listed on IDEAS
    4. João Granja & Christian Leuz, 2017. "The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity," NBER Working Papers 24168, National Bureau of Economic Research, Inc.
    5. Sumit Agarwal & Vincent Y. S. Chen & Weina Zhang, 2016. "The Information Value of Credit Rating Action Reports: A Textual Analysis," Management Science, INFORMS, vol. 62(8), pages 2218-2240, August.
    6. repec:eee:jfinec:v:127:y:2018:i:1:p:94-112 is not listed on IDEAS
    7. repec:pal:jbkreg:v:19:y:2018:i:4:d:10.1057_s41261-017-0059-7 is not listed on IDEAS
    8. Keser, Claudia & Özgümüs, Asri & Peterlé, Emmanuel & Schmidt, Martin, 2017. "An experimental investigation of rating-market regulation," Journal of Economic Behavior & Organization, Elsevier, vol. 144(C), pages 78-86.
    9. repec:eee:corfin:v:51:y:2018:i:c:p:352-373 is not listed on IDEAS
    10. repec:eee:jimfin:v:85:y:2018:i:c:p:40-57 is not listed on IDEAS
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    12. Michael R King & Steven Ongena & Nikola Tarashev, 2016. "Bank standalone credit ratings," BIS Working Papers 542, Bank for International Settlements.
    13. Baghai, Ramin P. & Becker, Bo, 2018. "Non-rating revenue and conflicts of interest," Journal of Financial Economics, Elsevier, vol. 127(1), pages 94-112.

    More about this item

    Keywords

    Dodd-Frank; Reputation; Credit ratings; Information; Financial crisis;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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