Rating the Regulation. Legislating a credit opinion

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2017-08-17
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en
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Credit rating agency failures were one of the causes of the past financial crises. This thesis investigates some of the regulations of rating agencies in the European Union introduced after the crises. Three regulations were introduced. The first regulation established transparency and public disclosure requirements. Mostly centred around the methodology and models of the agencies. The second regulation establishes the EU-wide supervision authority and supremacy of the EU regulator ESMA. The third regulation expands the transparency and disclosure requirements and sets up a rotation scheme for rating agencies to prevent conflicts of interest. Using a fixed effects model with interaction variables this thesis investigates the impact of the regulations on the impact of ratings on bank stock returns. It finds that the first and second regulations increase the informational quality of ratings (both individual and sovereign). After the legal change investors demand lower returns for similar ratings. The third regulation however decreases information quality for sovereign ratings according to investors. The final theoretical contribution of this thesis is the fact that it indicates that the risk-return anomaly may be driven by sovereign rating changes rather than individual ratings. The impact of these regulations vary per geographic region.
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Faculteit der Managementwetenschappen
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