The Value of Ratings: Evidence from their Introduction in Securities Markets

Asaf Bernstein, Carola Frydman and Eric Hilt

No 31064, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the effects of the first-ever ratings for corporate securities. In 1909, John Moody published a book that partitioned the majority of listed railroad bonds into letter-graded ratings based on his assessments of their credit risk. These ratings had no regulatory implications and were largely explainable using publicly available information. Despite this, we find that lower than market-implied ratings caused a rise in secondary market bond yields. Using an instrumental-variables design, we show that bonds that were rated experienced a substantial decline in their bid-ask spreads, which is consistent with reduced information asymmetries and improved liquidity. Our findings suggest that ratings can improve information transmission, even in settings with the highest monetary stakes, and highlight their potential value for the functioning of financial markets.

JEL-codes: G24 G28 N21 N81 (search for similar items in EconPapers)
Date: 2023-03
New Economics Papers: this item is included in nep-des, nep-fmk, nep-his and nep-mac
Note: AP CF DAE
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