Mandatory Disclosure by Credit Rating Agencies and Investment Sensitivity to Stock Price: A Managerial Learning Perspective
Mandatory Disclosure by Credit Rating Agencies and Investment Sensitivity to Stock Price: A Managerial Learning Perspective
Date
2021
Authors
Kim, Jaewoo
Park, Seyoung
Wilson, Ryan
Contributor
Advisor
Department
Instructor
Depositor
Speaker
Researcher
Consultant
Interviewer
Journal Title
Journal ISSN
Volume Title
Publisher
Volume
Number/Issue
Starting Page
Ending Page
Alternative Title
Abstract
We study the effect of mandatory disclosure by credit rating agencies (CRAs) on investment-price
sensitivity. We use the Credit Rating Agency Reform Act (CRARA) in 2006 as a mandatory
disclosure setting for CRAs and find an increase in investment-price sensitivity for firms affected
by the CRARA. In line with the CRARA alleviating investors’ concern about firm-specific
accounting fraud risk, the increase is more pronounced among firms suspected to engage in more
earnings management. The sensitivity of investment to stock prices is also more marked among
firms with multiple dimensions of uncertainty, firms with higher growth options, firms facing
steeper competition, or firms in which managers are less privately informed. Our findings are
consistent with managers’ reliance on stock prices increasing when stock prices become more
informative to managers’ investment decisions after the CRARA. Corroborating improved
investment efficiency, we further find an increase in future profitability for firms affected by the
CRARA.
Description
Keywords
Mandatory disclosure,
credit ratings,
credit rating agency,
regulation,
informational feedback effect of stock prices,
managerial learning,
investment-price sensitivity,
investment,
informed trading
Citation
Extent
Format
Geographic Location
Time Period
Related To
Rights
Rights Holder
Collections
Email libraryada-l@lists.hawaii.edu if you need this content in ADA-compliant format.