Credit Ratings and the Cost of Municipal Financing

A common belief held among researchers and policy makers is that regulatory reliance has inflated market demand for credit ratings, despite their decreasing informational value. Advances in information technology, coupled with reputation losses following the subprime crisis, renew the question of whether investors still rely on ratings to assess credit risk. Using Moody's 2010 scale recalibration, which was unrelated to changing issuer fundamentals, we find that ratings still matter to investors and to issuers-apart from any regulatory implications. Our results commend improved disclosure to mitigate mechanistic reliance on ratings and inefficiencies due to rating standards that vary across asset classes.