Melbourne Accounting Research Seminar - Professor Phillip Stocken

Professor Phillip Stocken from Dartmouth College will present a MARS seminar.

Topic: Credit Ratings and Cheap Talk

Abstract: We examine whether the cheap-talk framework explains the institutional environment in which rating agencies communicate with investors. When information is unverifiable, we expect that more favorable credit ratings are less informative to investors. Using the standard deviation of yields to measure informativeness, we find that the standard deviation of yields is higher for more favorable rating categories compared to less favorable rating categories. To better identify the informativeness of ratings, we then examine Moody’s 2010 municipal bond recalibration. We posit and find that more favorable Moody’s credit ratings are increasingly less informative to investors in the period after Moody’s recalibration relative to before the recalibration. We also find that retail investors are less likely to comprehend the unverifiable nature of credit ratings in the post recalibration period. This conclusion has implications for the regulation of credit rating agencies and highlights the importance of aligning interests between rating agencies and investors.

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