The Relevance of Credit Ratings in Transparent Bond Markets

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 provided by credit spreads. Dissemination increases the efficiency of information aggregation and transmission in bond markets, thereby reducing the incremental information content of ratings and the price impact of rating revisions. Received June 8, 2017; editorial decision January 24, 2018 by Editor Philip Strahan. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.