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Regulation, Asset Complexity, and the Informativeness of Credit Ratings

Author

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  • Rainer Jankowitsch
  • Giorgio Ottonello
  • Marti G Subrahmanyam

Abstract

We show that the effect of regulation on credit rating informativeness depends on asset complexity. Using the Dodd-Frank Act as a shock to the rating industry, we analyze the impact of rating changes on market prices, conditioning on various measures of complexity. Rating informativeness improves after Dodd-Frank, but not for assets with high complexity. Our results are robust to alternative measures of informativeness and provide strong evidence that the impact of regulation varies in the cross-section of securities. Our findings are consistent with models combining rating shopping with rating agencies that strategically decide on information acquisition and rating inflation. (JEL, G12, G32)Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Rainer Jankowitsch & Giorgio Ottonello & Marti G Subrahmanyam, 2023. "Regulation, Asset Complexity, and the Informativeness of Credit Ratings," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 12(3), pages 581-612.
    • Handle: RePEc:oup:rcorpf:v:12:y:2023:i:3:p:581-612.
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    File URL: http://hdl.handle.net/10.1093/rcfs/cfac003
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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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