2018
DOI: 10.1093/rfs/hhy031
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The Relevance of Credit Ratings in Transparent Bond Markets

Abstract: Mandated public dissemination of over-the-counter transactions in corporate debt securities via the TRACE system dramatically reduces the average short-term market reaction to rating downgrades by both issuer-paid and investor-paid rating agencies. Ratings become relatively more accurate predictors of default and more sensitive to innovations in credit spreads after the introduction of dissemination. However, in transparent markets, they provide no significant information about future defaults beyond that prov… Show more

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Cited by 47 publications
(9 citation statements)
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“…They interpret the post-TRACE increase in drift as evidence that the implementation of TRACE reduces price informativeness. Their conclusion is different from Badoer and Demiroglu (2019) and Chen and Lu (2019), both of whom find that prices become more informative following the implementation of TRACE.…”
Section: Allocation Of Control Rights In a Transparent Bond Marketmentioning
confidence: 70%
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“…They interpret the post-TRACE increase in drift as evidence that the implementation of TRACE reduces price informativeness. Their conclusion is different from Badoer and Demiroglu (2019) and Chen and Lu (2019), both of whom find that prices become more informative following the implementation of TRACE.…”
Section: Allocation Of Control Rights In a Transparent Bond Marketmentioning
confidence: 70%
“…phases included issuers with more actively traded bond issues (Bessembinder and Maxwell 2008 The implementation of TRACE led to a significant improvement in price transparency, reduced transaction costs and illiquidity, improved the informativeness of prices, reduced price dispersion, and allowed faster incorporation of new information (e.g., Badoer and Demiroglu 2019;Bessembinder and Maxwell 2008;Chen and Lu 2019;Goldstein and Hotchkiss 2012). We incorporate prior evidence on the impact of TRACE in Section 3.2.…”
Section: The Implementation Of Tracementioning
confidence: 99%
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“…With respect to the benefits, the evidence suggests that dissemination has led to substantial reductions in both trade execution costs and price dispersion (Bessembinder, Maxwell, and Venkataraman (2006), Goldstein, Hotchkiss, and Sirri (2007), Bessembinder and Maxwell (2008), Asquith, Covert, and Pathak (2019)). Prior evidence further suggests that dissemination leads bond prices to incorporate new information more rapidly (Chen and Lu (2017)) and reduces information gaps in the marketplace, thereby increasing investors' reliance on market prices (Badoer and Demiroglu (2019)). These benefits could be reduced, however, by the reduced incentives to collect private information by informed traders (see, for example, Madhavan (1995), Pagano and Roell (1996), and Lewis and Schwert (2021)).…”
mentioning
confidence: 99%
“…Kraft (2015a) finds that Moody's makes upward rating adjustments to help firms avoid rating triggers in their borrowing contracts, suggesting that conflicts of interest may be detrimental to rating informativeness. Badoer and Demiroglu (2018) show that when the corporate bond market becomes more transparent due to the public dissemination of bond prices, the importance of credit ratings as an information source diminishes dramatically.…”
Section: Cras' Incentives and Their Informational Rolementioning
confidence: 99%