Do Investors Care About Credit Ratings? An Analysis Through the Cycle
36 Pages Posted: 17 Oct 2011 Last revised: 22 Oct 2011
Date Written: July 25, 2011
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: Suggested Citation