We investigate how the credit cycle affects the link between bond spreads and credit ratings. Using a simple model of the credit assessment process, we show that when the debt market is more opaque, the information content of ratings deteriorates, 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 deteriorates as investors increasingly price in non-public information.

Do investors care about credit ratings? An analysis through the cycle

IANNOTTA, GIULIANO ORLANDO;NOCERA, GIACOMO;RESTI, ANDREA CESARE
2013

Abstract

We investigate how the credit cycle affects the link between bond spreads and credit ratings. Using a simple model of the credit assessment process, we show that when the debt market is more opaque, the information content of ratings deteriorates, 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 deteriorates as investors increasingly price in non-public information.
2013
Iannotta, GIULIANO ORLANDO; Nocera, Giacomo; Resti, ANDREA CESARE
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11565/3790694
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