Legislative pressure and credit rating agency behavior

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Abstract

This study investigates whether legislative pressure influences credit rating agency (CRA) behavior. It covers a time period in which the European Union moves from exerting minimal to intense legislative pressure on CRAs, providing an almost ideal context for analyzing if and how CRAs are affected by this pressure. Two possible outcomes are discussed: 1) more timeliness in the flow of information and 2) more stickiness in the flow of information. The analysis is based on an examination of market reactions following CRA announcements between 2000 and 2019. The results show that the market reactions after CRA announcements decrease when legislative pressure increases. The interpretation is that as legislative pressure increases, the flow of information from CRAs becomes stickier. This confirms that legislative initiatives that put pressure on CRAs have an effect, evidence that legislators’ intention to change behavior by threatening or initiating new regulations works, which confirms assumptions underlying the theory of legislative threats (Halfteck, 2008). A reasonable interpretation of legislators’ push for changes in this context is that they want to see a faster flow of information. The results, however, show the opposite. A plausible explanation for this is increased caution on the part of CRAs because if in retrospect, the information in an announcement turns out to be wrong or misleading, the ensuing criticism could lead to additional pressure.

Keywords: Credit Rating Agencies, Legislative Pressure, Stickiness, Timeliness

Authors’ individual contribution: The Author is responsible for all the contributions to the paper according to CRediT (Contributor Roles Taxonomy) standards.

Declaration of conflicting interests: The Author declares that there is no conflict of interest.

Acknowledgements: This study was funded by Jan Wallanders and Tom Hedelius Foundation, Handelsbanken (grant number P18-0128).

JEL Classification: G14, G24, G28, G30, G34

Received: 30.03.2021
Accepted: 01.06.2021
Published online: 04.06.2021

How to cite this paper: Nilsson, O. (2021). Legislative pressure and credit rating agency behavior. Risk Governance and Control: Financial Markets & Institutions, 11(2), 58–70. https://doi.org/10.22495/rgcv11i2p5