Abstract
We find that mandated public dissemination of over-the-counter transactions in corporate debt securities via the TRACE system dramatically reduces the average short-term market reaction to rating downgrades by both issuer-paid and investor-paid rating agencies. The effect of dissemination is greatest where there is greater uncertainty about credit risk. After dissemination, ratings become more accurate predictors of default and more sensitive to innovations in credit spreads. Both before and after dissemination, ratings provide no incremental credit risk information relative to credit spreads. These results suggest that the dissemination of over-the-counter trades fills information gaps and reduces reliance on credit ratings.
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