Credible Credit Raters?: An Analysis of Credit Rating Actions in the American Financial Markets

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2012
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Haverford College. Department of Economics
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eng
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Open Access
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Abstract
To what extent do the credit rating agencies play a meaningful role in the American financial markets, and how has the 2008 Financial Crisis affected that role? To answer both of these questions, this study applies an Ordinary Least Squares regression analysis and an Abnormal Returns event study to a panel data set that contains the credit rating actions and asset returns (bond and stock) for a sample of fifty five corporations traded on the New York Stock Exchange from 2005 to 2011. The major findings are three-fold: credit rating agencies play a significant role in the bond market, as downgrades lead to large increases in bond spreads; the agencies’ role in the stock market is ambiguous; and, the Financial Crisis lead to a greater effect of downgrades on bond spreads. Though the paper’s framing premise is that the credit raters are not “credible”—given their recent mishandling of the mortgage-backed security industry—the findings suggest that raters’ actions actually take on more significance following the 2008 Financial Crisis.
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