Credit ratings and the cost of municipal financing

Research output: Contribution to journalArticle

7 Citations (Scopus)

Abstract

A common belief held among researchers and policy makers is that regulatory reliance has inflated market demand for credit ratings, despite their decreasing informational value. Advances in information technology, coupled with reputation losses following the subprime crisis, renew the question of whether investors still rely on ratings to assess credit risk. Using Moody's 2010 scale recalibration, which was unrelated to changing issuer fundamentals, we find that ratings still matter to investors and to issuers-apart from any regulatory implications. Our results commend improved disclosure to mitigate mechanistic reliance on ratings and inefficiencies due to rating standards that vary across asset classes.

Original languageEnglish (US)
Pages (from-to)2038-2079
Number of pages42
JournalReview of Financial Studies
Volume31
Issue number6
DOIs
StatePublished - Jun 1 2018

Fingerprint

Financing
Costs
Credit rating
Rating
Investors
Assets
Market demand
Politicians
Subprime crisis
Credit risk
Common belief
Inefficiency
Disclosure

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

@article{cb52981b58fc4533bcb8f4d594a1855c,
title = "Credit ratings and the cost of municipal financing",
abstract = "A common belief held among researchers and policy makers is that regulatory reliance has inflated market demand for credit ratings, despite their decreasing informational value. Advances in information technology, coupled with reputation losses following the subprime crisis, renew the question of whether investors still rely on ratings to assess credit risk. Using Moody's 2010 scale recalibration, which was unrelated to changing issuer fundamentals, we find that ratings still matter to investors and to issuers-apart from any regulatory implications. Our results commend improved disclosure to mitigate mechanistic reliance on ratings and inefficiencies due to rating standards that vary across asset classes.",
author = "Jess Cornaggia and Cornaggia, {Kimberly J.} and Israelsen, {Ryan D.}",
year = "2018",
month = "6",
day = "1",
doi = "10.1093/rfs/hhx094",
language = "English (US)",
volume = "31",
pages = "2038--2079",
journal = "Review of Financial Studies",
issn = "0893-9454",
publisher = "Oxford University Press",
number = "6",

}

Credit ratings and the cost of municipal financing. / Cornaggia, Jess; Cornaggia, Kimberly J.; Israelsen, Ryan D.

In: Review of Financial Studies, Vol. 31, No. 6, 01.06.2018, p. 2038-2079.

Research output: Contribution to journalArticle

TY - JOUR

T1 - Credit ratings and the cost of municipal financing

AU - Cornaggia, Jess

AU - Cornaggia, Kimberly J.

AU - Israelsen, Ryan D.

PY - 2018/6/1

Y1 - 2018/6/1

N2 - A common belief held among researchers and policy makers is that regulatory reliance has inflated market demand for credit ratings, despite their decreasing informational value. Advances in information technology, coupled with reputation losses following the subprime crisis, renew the question of whether investors still rely on ratings to assess credit risk. Using Moody's 2010 scale recalibration, which was unrelated to changing issuer fundamentals, we find that ratings still matter to investors and to issuers-apart from any regulatory implications. Our results commend improved disclosure to mitigate mechanistic reliance on ratings and inefficiencies due to rating standards that vary across asset classes.

AB - A common belief held among researchers and policy makers is that regulatory reliance has inflated market demand for credit ratings, despite their decreasing informational value. Advances in information technology, coupled with reputation losses following the subprime crisis, renew the question of whether investors still rely on ratings to assess credit risk. Using Moody's 2010 scale recalibration, which was unrelated to changing issuer fundamentals, we find that ratings still matter to investors and to issuers-apart from any regulatory implications. Our results commend improved disclosure to mitigate mechanistic reliance on ratings and inefficiencies due to rating standards that vary across asset classes.

UR - http://www.scopus.com/inward/record.url?scp=85053027893&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=85053027893&partnerID=8YFLogxK

U2 - 10.1093/rfs/hhx094

DO - 10.1093/rfs/hhx094

M3 - Article

AN - SCOPUS:85053027893

VL - 31

SP - 2038

EP - 2079

JO - Review of Financial Studies

JF - Review of Financial Studies

SN - 0893-9454

IS - 6

ER -