Regulatory Reform, Multiple Credit Ratings and the Quality of the Corporate Information Environment

Abstract

This paper examines the change in the regulatory use of multiple credit ratings after the Dodd-Frank Act (Dodd-Frank). We find that post Dodd-Frank reform firms are less likely to demand a third rating, which is typically provided by Fitch. Third ratings also become less informative with a much weaker market impact on credit spreads for firms on opposite sides of the high yield (HY) - investment grade (IG) boundary. Moreover, we find that post-Dodd-Frank, firms without external monitoring from a third ratings agency systematically manage their earnings more and have higher cash flow and sales volatilities. Overall, the results shed light on the unintended consequences of Dodd-Frank on competition within the ratings industry, the quality of the information environment, and the cost of borrowing for issuers.