The Impact of Increased Credit Rating Quality on Rated Firms

Abstract

Following the subprime mortgage crisis of 2007-2008, credit rating agencies (CRAs) faced scathing criticisms from the media and regulators for their role in the unfolding of the Global Financial Crisis (FC). The ensuing reputational damage and the changes to the regulation of CRAs led them to make numerous changes to their rating standards. Several prior studies have since examined the impact of these changes on rating quality, documenting tighter rating standards, lower ratings, and a change in rating quality after the FC. Despite these findings, however, little is understood about how a change in rating quality affects rated firms, and how firms respond to such a change. Using the tighteni..