Unintended Consequences of the Dodd–Frank Act on Credit Rating Risk and Corporate Finance

Authors

Bina Sharma
Binay K. Adhikari
Anup Agrawal
Bruno R. Arthur, The University of Texas Rio Grande ValleyFollow
Monika K. Rabarison, The University of Texas Rio Grande ValleyFollow

Document Type

Article

Publication Date

1-17-2022

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.

Comments

© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Recommended Citation

Sharma, B., Adhikari, B.K., Agrawal, A., Arthur, B.R. and Rabarison, M.K., 2022. Unintended Consequences of the Dodd–Frank Act on Credit Rating Risk and Corporate Finance. Journal of Financial and Quantitative Analysis, 57(6), pp.2286-2323. http://doi.org/10.1017/S0022109021000831

Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

Publication Title

Journal of Financial and Quantitative Analysis

DOI

10.1017/S0022109021000831