Does the Dodd-Frank Act Reduce the Conflict of Interests of Credit Rating Agencies?

This paper compares the behavior of standard or issuer-paid rating agencies (represented by Standard & Poor's, S&P) to alternative or investor-paid rating agencies (represented by the Egan and Jones Rating company, EJR) after the passage of the Dodd-Frank Act. Results show that both S&P and EJR ratings are more conservative, stable and, on average, lower after the Dodd-Frank regulation. However, EJR ratings are higher for firms that potentially may generate a high revenue. Additionally, I find that, after the regulation, S&P cares more about its reputation. Exploiting a measure that captures the bond market ability to anticipate rating downgrades, I show that, after Dodd-Frank, bond market anticipation decreases for S&P but increases for EJR suggesting that S&P ratings are timilier. Finally, the paper studies how the bond market responds to rating changes and how firms perceive ratings in their decision of debt issuance in the post Dodd-Frank period. Results suggest that both S&P downgrades and upgrades generate a greater bond market response. On the contrary, only EJR upgrades have a magnified effect on bond market returns. The greater informativeness of S&P ratings after Dodd-Frank is confirmed by the meaningful impact of these ratings on firm debt issuance