The Role of Credit Rating Changes on Opacity in the Municipal Bond Market

We find that corporate credit rating changes have an effect on firms' voluntary disclosure behavior that is independent of the information they convey about firm fundamentals. Our analyses exploit two separate quasi-experimental settings that generate either exogenous credit rating downgrades or credit rating upgrades (i.e., credit rating label changes). We find evidence of a negative relation between the direction of the credit rating label change and the provision of voluntary disclosure in both settings-firms respond to exogenous downgrades by increasing voluntary disclosure and to exogenous upgrades by decreasing voluntary disclosure. The effects we document are attributable to the regulatory role rather than the information role of credit ratings. Overall, our analyses indicate that credit rating agencies as gatekeepers influence firms' provision of voluntary disclosure.

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Determinants of the Credit Rating Fee in the Municipal Bond Market

Public Budgeting &amp Finance ◽

10.1111/j.1540-5850.2013.12000.x ◽

2013 ◽

Vol 33 (1) ◽

pp. 25-48 ◽

Cited By ~ 3

Author(s):

TODD L. ELY ◽

CHRISTINE R. MARTELL ◽

SHARON N. KIOKO

Keyword(s):

Credit Rating ◽

Bond Market ◽

Municipal Bond

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Information Imprecision

The Accounting Review ◽

10.2308/tar-2018-0229 ◽

2020 ◽

pp. 0000-0000

Author(s):

Ryan T Ball ◽

Christine Cuny

Keyword(s):

Term Structure ◽

Credit Rating ◽

Credit Default Swap ◽

Empirical Measure ◽

Prior Beliefs ◽

Asset Value ◽

Credit Default ◽

Information Set ◽

Rating Changes

This study develops and applies a model-implied measure of information imprecision. We define information imprecision as the degree of noise in investors' prior beliefs about the firm's asset value based on the information set that is currently available. We present a model of credit default swap (CDS) spreads in which the term structure is a function of information imprecision. We exploit observable CDS spreads with short and long maturities to extract an empirical measure of information imprecision. We then examine the moderating role of our measure in two settings. First, we show that the equity market response to credit rating changes increases in the level of information imprecision before the announcement. Second, we show that bond-market professionals' ability to charge a premium to smaller investors, relative to larger investors, increases in the issuing firm's information imprecision. This evidence illustrates the broad applicability of our model-implied measure of information imprecision.

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