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Did Government Regulations Lead to Inflated Credit Ratings?

Author

Listed:
  • Patrick Behr

    (Brazilian School of Public and Business Administration, Fundação Getúlio Vargas, 22253-900 Rio de Janeiro, Brazil)

  • Darren J. Kisgen

    (Carroll School of Management, Boston College, Chestnut Hill, Massachusetts 02467)

  • Jérôme P. Taillard

    (Babson College, Babson Park, Massachusetts 02457)

Abstract

Securities and Exchange Commission (SEC) regulations in 1975 gave select rating agencies increased market power by increasing both barriers to entry and the reliance on ratings for regulations. We test whether these regulations led to ratings inflation. We find that defaults and negative financial changes are more likely for firms given the same rating if the rating was assigned after the SEC action. Furthermore, firms initially rated Baa in the post-regulation period are 19% more likely to be negatively downgraded to speculative grade than firms rated Baa in the pre-regulation period. These results indicate that the market power derived from the SEC led to ratings inflation.

Suggested Citation

  • Patrick Behr & Darren J. Kisgen & Jérôme P. Taillard, 2018. "Did Government Regulations Lead to Inflated Credit Ratings?," Management Science, INFORMS, vol. 64(3), pages 1034-1054, March.
    • Handle: RePEc:inm:ormnsc:v:64:y:2018:i:3:p:1034-1054
    DOI: 10.1287/mnsc.2016.2615
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    References listed on IDEAS

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    4. Liu, Yan, 2023. "Essays on credit rating agencies in China," Other publications TiSEM b54b3315-1185-48b8-aaf8-8, Tilburg University, School of Economics and Management.
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