Abstract
This paper analyzes how reputational shocks and regulatory reforms have affected the value-relevant information content of rating adjustments announced by the main Credit Rating Agencies (CRAs). We analyze the U.S. stock market at the firm level. Our novel empirical findings show the inverse relation between rating revisions and the stock price synchronicity, indicating additional information impounded in prices after rating changes. We find that investors consider downgrades more valuable after the Enron, WorldCom and Lehman Brothers defaults. Investors interpret reputational distress as a disciplinary event that prompts agencies to improve the rating process to recover their reputation. Agencies efforts seem to be greater for worse-rated issues. Our analysis of rating-related regulation indicates that the changes in regulation did not always increase the value-relevant information in rating. We find less informative rating changes after the passage of rules that increase the reliance on ratings or enhance the competition among agencies. Conversely, when the objective is to reduce the regulatory reliance, CRAs react by issuing more informative ratings, thus increasing their utility for market participants.
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