Revision of Regulation Fair Disclosure under the Dodd-Frank Act and the Timing of Credit Rating Issuances

Abstract

Dodd-Frank Act of 2010 eliminated a Regulation Fair Disclosure rule, which allowed U.S. public companies to make selective disclosures to credit rating agencies (CRAs). However, CRAs and legal experts argue that given the other provisions in Regulation Fair Disclosure, which allow companies to make selective disclosures to CRAs if they expressly agree to keep the confidentiality, this revision is unlikely to affect their access to issuers’ non-public information. This study investigates the effect on the timing of credit rating issuances to address whether CRAs’ access to non-public information reduces after the regulatory change. We show that after the regulatory change, the likelihood of CRAs issuing rating downgrades following firms’ earnings announcements increases. This result suggests that after the regulatory change, issuer firms reduce selective disclosure of negative information to CRAs, thereby increasing CRAs’ reliance on firms’ public disclosures. We further show that the above result is more pronounced for firms with greater incentive to withhold bad news from CRAs.