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Does Regulatory Certification Affect the Information Content of Credit Ratings?

Valentina Bruno, Jess Cornaggia () and Kimberly J. Cornaggia ()
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Jess Cornaggia: McDonough School of Business, Georgetown University, Washington, DC 20057
Kimberly J. Cornaggia: Kogod School of Business, American University, Washington, DC 20016

Management Science, 2016, vol. 62, issue 6, 1578-1597

Abstract: We exploit an investor-paid rating agency’s designation as a Nationally Recognized Statistical Rating Organization (NRSRO) to test whether this certification affects the agency’s information production. We use a certified issuer-paid agency as a benchmark and find robust evidence that the investor-paid agency’s ratings policy—both timelier and more symmetric with respect to positive and negative information—persists after it became certified for regulatory compliance. Our results suggest that ratings policy is more a function of rating agency compensation structure than the NRSRO certification by the U.S. Securities and Exchange Commission. This paper was accepted by Gustavo Manso, finance.

Keywords: credit ratings; NRSRO; capital markets regulation; certification (search for similar items in EconPapers)
Date: 2016
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Handle: RePEc:inm:ormnsc:v:62:y:2016:i:6:p:1578-1597