Credit Rating Agencies, Financial Regulations and the Capital Markets

This thesis studies the role of credit rating agencies (CRAs) in capital markets, and the effects of two important regulatory decisions that are taken to improve the quality of information available to the capital markets. In particular, this thesis examines a) the importance of credit ratings to the debt markets and the level of trust investors place on CRAs b) whether the adoption of International Financial Reporting Standards (IFRS) improves the quality of accounting information in European Union, and c) whether implementation of Market Abuse Directive (MAD) has been successful in deterring the market manipulation activities, improving the quality and flow of information to the capital markets, and reducing selective disclosure of private information. Chapter 2 of this thesis shows that the extent of investors’ reliance on the credit ratings depends on whether or not these ratings correspond to the ratings that are expected based on publically available information. Chapter 3 demonstrates that the reporting under IFRS is associated with higher credit ratings and a lower probability and level of rating disagreements between CRAs. The results in Chapter 4 reveal a decrease in the level of market manipulation activities and the provision of selective disclosures subsequent to the implementation of MAD. Chapter 4 also provides evidence of more timely and accurate information flowing to the security markets after implementation of MAD. Overall the findings in this thesis show that the participants in the capital markets prefer credit ratings that have strong association with the publically available information and that financial regulations introduced during the last decade enhanced the quantity and quality of information available to the capital markets.

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