Municipal Bond Market Effects of Credit Rating Dissemination

Abstract

We examine the effect of dissemination on transaction costs in the municipal bond market by exploiting a regulatory change that made municipal credit rating information prepared by two of the three major credit rating agencies freely and publicly available on the Electronic Municipal Market Access (EMMA) database. We use a difference-in-differences framework that compares subsequent trading in bonds issued before the regulatory change, where the difference is whether rating information is provided on EMMA or not. We find that the dissemination of credit ratings reduced transaction costs primarily for retail investors. We also find that the dissemination effects are concentrated in bond purchases and are amplified when the information environment of the issuer is poor. Collectively, we interpret these results as indicating that the broad dissemination of credit rating information lowers transaction costs when information acquisition costs are high.