Do Investors Care About Credit Ratings? An Analysis Through the Cycle

36 Pages Posted: 17 Oct 2011 Last revised: 22 Oct 2011

See all articles by Giuliano Iannotta

Giuliano Iannotta

Università Cattolica

Giacomo Nocera

Audencia Business School

Andrea Resti

Bocconi University - Department of Finance

Date Written: July 25, 2011

Abstract

We investigate how the link between bond spreads and credit ratings is affected by the credit cycle. Using a simple model of the credit assessment process, we show that when the debt market is more opaque, the information content of ratings becomes poorer, creating an incentive for investors to increase the amount spent on private information. We test this hypothesis empirically. Results show that, when market opaqueness (proxied by the spread between Aaa and Baa-rated bonds) increases, the explanatory power of ratings and other control variables becomes poorer, as investors increasingly price in non-public information.

Keywords: Bonds, Credit spreads, Ratings, Opaqueness

JEL Classification: G12, G15, G24

Suggested Citation

Iannotta, Giuliano and Nocera, Giacomo and Resti, Andrea, Do Investors Care About Credit Ratings? An Analysis Through the Cycle (July 25, 2011). Available at SSRN: https://ssrn.com/abstract=1945312 or http://dx.doi.org/10.2139/ssrn.1945312

Giuliano Iannotta

Università Cattolica ( email )

20123 Milano
Italy

Giacomo Nocera (Contact Author)

Audencia Business School ( email )

8 route de la Jonelière, BP 31222
Nantes Cedex 3, Cedex 3 44312
France

Andrea Resti

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

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