| Popis: |
Over the last 25 years there has been a drastic change in the distribution of corporate bond ratings. Between 1985 and 2010 the number of firms issuing AAA or AA rated debt has dropped by 70%, while the number of firms issuing A or BBB rated debt has increased by 77% and those issuing speculative grade debt has increased by 129%. I examine possible causes for this trend, such as firms simply becoming "riskier" or an increase in the rate at which firms merge. I find no empirical support for these explanations. Instead, I propose the following mechanism: investors learn about firms not only through credit ratings, but also through publicly available financial information. As this public information proliferates investors rely more on this channel. Because firms forego profits to comply with the suggestions of credit rating agencies, improving their rating is costly. Considering this cost, I offer the following conjecture. As the accuracy of public financial information increases, investors learn more about firms through this costless channel and good firms are now able to eschew high ratings. To formalize this story, I develop a model that includes a passive debt rating agency and investors that have access to a "noisy'' public signal about the return to the firm's project. Firms devote resources to improving their rating which will both lower borrowing costs and increase the probability that they receive an investment. As the accuracy of the public signal increases, firms choose to lower their investment in ratings. Under general conditions, the number of high rated firms decreases in response to an increase in public signal accuracy. One implication of the model is an increase in the dispersion of bond prices within a rating category. Using the Mergent Fixed Income Securities Database, I document an increase of 56% for AAA and AA rated bonds and 29% for A and BBB and confirm this implication of the model. I also construct a test to determine whether the change in dispersion is statistically significant. |
