Does the Dodd-Frank Act reduce the conflict of interests of credit rating agencies? |
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Institution: | 1. Shanghai Univ. of Finance & Economics, China;2. University of Manitoba, Canada;3. Fanhai Int''l School of Finance, Fudan Univ., China;1. Chilean Superintendency of Banks and Financial Institutions (SBIF), Chile;2. IGIER, Bocconi University, Milan, Italy;3. University of Cyprus, Cyprus |
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Abstract: | I compare issuer-paid ratings, represented by Standard & Poor's (S&P) to investor-paid ratings, represented by Egan-Jones Ratings Company (EJR), after the passage of the Dodd-Frank Act. My results show that S&P ratings are lower than EJR ratings in the post-Dodd-Frank period, especially for firms able to generate revenue to credit rating agencies (CRAs); i.e., firms with a large bond issuance, larger firms, and low-performing firms. Further, I find evidence of a greater accuracy of S&P ratings relative to EJR ratings in the post-Act period as shown by the lower probability of large credit rating changes and rating reversals. Finally, I show that issuer-paid ratings are more concerned about providing timely ratings in the post-Dodd-Frank period, thus protecting their reputation as leading information providers, than investor-paid ratings. My results are robust to a wide battery of robustness tests. |
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