Unintended Consequences of the Dodd–Frank Act on Credit Rating Risk and Corporate Finance. (17th September 2022)

• Record Type: Journal Article
• Authors: Sharma, Bina; Adhikari, Binay K.; Agrawal, Anup; Arthur, Bruno R.; Rabarison, Monika K.
• Is Part Of: Journal of financial and quantitative analysis. Volume 57:Number 6(2022)
• Page Start: 2286
• Page End: 2323
• Publication Date: 2022-09-17
• Subjects: Finance -- Periodicals; Investments -- Mathematics -- Periodicals; 332.05
• DOI: 10.1017/S0022109021000831
• Languages: English
• ISSNs: 0022-1090

Abstract

Abstract: Prior research finds that Dodd–Frank Act's regulations on credit rating agencies (CRAs) increase rated firms' risk of rating downgrades, regardless of their credit quality. Our difference-in-difference estimates suggest that after Dodd–Frank, low-rated firms, which face steep costs from a further downgrade, significantly reduce their debt issuance and investments compared to similar unrated firms. Our results are not driven by credit supply or the financial crisis. They reveal an unintended consequence of Dodd–Frank: Greater regulatory pressure on CRAs leads to negative spillover effects on firms concerned about credit ratings, regardless of their credit quality.