The Value of Ratings: Evidence from their Introduction in Securities Markets / Asaf Bernstein, Carola Frydman, Eric Hilt.

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Bernstein, Asaf

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w31064.Publication details: Cambridge, Mass. National Bureau of Economic Research 2023.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: We study the effects of the first-ever ratings for corporate securities. In 1909, John Moody published a book that partitioned the majority of listed railroad bonds into letter-graded ratings based on his assessments of their credit risk. These ratings had no regulatory implications and were largely explainable using publicly available information. Despite this, we find that lower than market-implied ratings caused a rise in secondary market bond yields. Using an instrumental-variables design, we show that bonds that were rated experienced a substantial decline in their bid-ask spreads, which is consistent with reduced information asymmetries and improved liquidity. Our findings suggest that ratings can improve information transmission, even in settings with the highest monetary stakes, and highlight their potential value for the functioning of financial markets.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w31064 (Browse shelf(Opens below))	Not For Loan

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March 2023.

We study the effects of the first-ever ratings for corporate securities. In 1909, John Moody published a book that partitioned the majority of listed railroad bonds into letter-graded ratings based on his assessments of their credit risk. These ratings had no regulatory implications and were largely explainable using publicly available information. Despite this, we find that lower than market-implied ratings caused a rise in secondary market bond yields. Using an instrumental-variables design, we show that bonds that were rated experienced a substantial decline in their bid-ask spreads, which is consistent with reduced information asymmetries and improved liquidity. Our findings suggest that ratings can improve information transmission, even in settings with the highest monetary stakes, and highlight their potential value for the functioning of financial markets.