The impact of Dodd-Frank on credit ratings and bond yields: The municipal securities’ case

Source: Craig L. Johnson, Yulianti Abbas, and Chantalle E. LaFontant, Indiana University, April 2018

We empirically test the reputation and disciplining hypotheses on the potential impact of Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) on Standard & Poor’s (S&P) state government credit ratings and bond yields. Our empirical findings indicate that S&P ratings after Dodd-Frank are higher and more stable, as evidenced by fewer total rating changes. We find fewer overall negative rating actions, fewer rating downgrades, and more rating upgrades. We also find that after Dodd-Frank bond yields are lower and that Dodd-Frank impacted bond yields through credit ratings. The impact of Dodd-Frank on bond yield is significant across all rating classes. Our findings are consistent with the disciplining hypothesis, and we find no support for the reputation hypothesis.

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Ashton Goodfield (Deutsche Asset Management)