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The Value of Ratings: Evidence from their Introduction in Securities Markets

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  • Asaf Bernstein
  • Carola Frydman
  • Eric Hilt

Abstract

We study the effects of the first-ever ratings for corporate securities. In 1909, John Moody published a book that partitioned the majority of listed railroad bonds into letter-graded ratings based on his assessments of their credit risk. These ratings had no regulatory implications and were largely explainable using publicly available information. Despite this, we find that lower than market-implied ratings caused a rise in secondary market bond yields. Using an instrumental-variables design, we show that bonds that were rated experienced a substantial decline in their bid-ask spreads, which is consistent with reduced information asymmetries and improved liquidity. Our findings suggest that ratings can improve information transmission, even in settings with the highest monetary stakes, and highlight their potential value for the functioning of financial markets.

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  • Asaf Bernstein & Carola Frydman & Eric Hilt, 2023. "The Value of Ratings: Evidence from their Introduction in Securities Markets," NBER Working Papers 31064, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31064
    Note: AP CF DAE
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    More about this item

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913
    • N81 - Economic History - - Micro-Business History - - - U.S.; Canada: Pre-1913

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