Credit Ratings and the Cost of Municipal Financing

Cornaggia, Jess; Cornaggia, Kimberly J.; Israelsen, Ryan D.

doi:10.1093/rfs/hhx094

Cited by 161 publications

(103 citation statements)

References 39 publications

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“…Consistent with prior studies using the recalibration setting, we cluster standard errors at the issuer level (e.g., Adelino, Cunha, and Ferreira [2017], Cornaggia, Cornaggia, and Israelsen [2018]). This assumes that the factors driving issuers' disclosure decisions are independent across issuers.…”

Section: Methodsmentioning

confidence: 94%

“…Adelino, Cunha, and Ferreira [2017] show that the recalibration reduced municipalities' financial constraints and increased government employment. Thus, similar to Cornaggia, Cornaggia, and Israelsen [2018], the mechanism in their study is a decrease in the cost of debt resulting from investor reliance on ratings. Beatty, Gillette, Petacchi, and Weber [2019] show that Moody's and Fitch charge higher fees and increase market share as a result of providing higher ratings, and it is unclear how this finding predicts changes in municipal disclosure.…”

Section: The Effect Of Credit Rating Upgrades On Municipal Disclosurementioning

confidence: 91%

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The Effect of Credit Ratings on Disclosure: Evidence from the Recalibration of Moody's Municipal Ratings

Gillette

Samuels

Zhou

2020

J of Accounting Research

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This paper examines how credit rating levels affect municipal debt issuers' disclosure decisions. Using exogenous upgrades in credit rating levels caused by the recalibration of Moody's municipal ratings scale in 2010, we find that upgraded municipalities significantly reduce their disclosure of required continuing financial information, relative to unaffected municipalities. Consistent with a reduction in debtholders' demand for information driving these results, the reduction in disclosure is greater when municipal bonds are * Sloan School of Management, MIT; † The Wharton School, University of Pennsylvania.Accepted by Christian Leuz. We gratefully acknowledge helpful comments and suggestions from John Core, held by investors who relied more on disclosure ex ante. However, we also find that the reduction in disclosure does not manifest when issuers are monitored by underwriters with greater issuer-specific expertise and when issuers are subject to direct regulatory enforcement through the receipt of federal funding. Overall, our results suggest that higher credit rating levels lower investor demand for disclosure in the municipal market, and highlight the role of underwriters and direct regulatory enforcement in maintaining disclosure levels when investor demand is low. JEL codes: G24; G28; H74; M40; M41

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Section: Methodsmentioning

confidence: 94%

Section: The Effect Of Credit Rating Upgrades On Municipal Disclosurementioning

confidence: 91%

The Effect of Credit Ratings on Disclosure: Evidence from the Recalibration of Moody's Municipal Ratings

Gillette

Samuels

Zhou

2020

J of Accounting Research

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“…2 In the same spirit as #1: Cornaggia et al (2015) show that the differences in the extent of disclosures among the issuers of various categories of municipal bonds have consequences with respect to the apparent usefulness of CRA ratings. The authors argue that their results support an argument for increasing and standardizing disclosures among such issuers.…”

Section: Some Recommendationsmentioning

confidence: 96%

“…As will be discussed below, these lags are a 'cultural' phenomenon for the CRA and not a consequence of their issuer-pays model. 30 For more discussion of this issue, see White (2013); for a recent effort to distinguish between the two effects, see Cornaggia et al (2015). 31 For this author's summary efforts, see White (2011White ( , 2014 backed securities (RMBS) by government-sponsored enterprises (i.e.…”

Section: Agencies and The Relevance Of Their Business Modelmentioning

confidence: 99%

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Credit Rating Agencies: An Analysis Through the Lenses of Industrial Organization, Finance and Regulation

White

2016

Pacific Economic Review

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This article uses insights from the disciplines of industrial organization and of finance, and the understanding that has developed within both disciplines with respect to regulation, for an analysis of the credit rating industry. bs_bs_banner 4 If an initial buyer of a bond sells the bond to another party, that latter party then assumes the claims on the borrower that are at the heart of the bond contract and, thus, becomes the lender. 5 A similar question, of course, can be asked by a prospective investor in the equity of a company. 6 Other actions that the lender can take to reduce the risk of non-repayment include accepting collateral as security for the repayment of the loan and asking for third-party co-signors or guarantors for the loan. CREDIT RATING AGENCIES 203

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Is options trading informed? Evidence from credit rating change announcements

Zhang

2019

Journal of Futures Markets

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Using a sample of proactive credit rating changes, this study examines the information content of options trading before news events. Pre‐event informed options trading predicts cumulative abnormal returns around credit rating change announcements. The predictability of options trading is more pronounced before announcements of more severe and surprising rating changes. Moreover, the information content of pre‐event options trading is greater when the pre‐event underlying stock market is less informational, when the options market is more liquid, and in the post–regulation fair disclosure period. Overall results are consistent with informed options trading before credit rating change announcements.

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Credit Ratings and the Cost of Municipal Financing

Cited by 161 publications

References 39 publications

The Effect of Credit Ratings on Disclosure: Evidence from the Recalibration of Moody's Municipal Ratings

The Effect of Credit Ratings on Disclosure: Evidence from the Recalibration of Moody's Municipal Ratings

Credit Rating Agencies: An Analysis Through the Lenses of Industrial Organization, Finance and Regulation

Is options trading informed? Evidence from credit rating change announcements

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