Does the Dodd-Frank Act Affect the Informativeness of Credit Rating Changes? Evidence from Audit Pricing

• In Event: Audit Regulation

Abstract

In an effort to improve the transparency of the credit rating process and create accountability for misleading ratings, the Dodd-Frank Act significantly altered credit rating agencies’ regulatory and legal environment. However, critics argue that Dodd-Frank’s provisions are not sufficient to regulate credit rating agencies effectively. Further, prior research provides mixed results on whether Dodd-Frank results in more informative credit ratings. This study investigates whether Dodd-Frank improved the informativeness of credit ratings by examining whether Dodd-Frank influences the extent to which auditors incorporate credit ratings into their audit pricing decisions. Auditors are a unique consumer of credit ratings because they use credit rating information to help assess client risk, but have access to the same private information as credit ratings agencies. We find that auditors incorporate more information from credit rating changes into their pricing decisions after Dodd-Frank became effective, suggesting that Dodd-Frank’s provisions improved the informativeness of credit ratings.

Authors

• Bradley Lawson, Oklahoma State University

• Sean Thomas McGuire, Texas A&M University

• Dechun Wang, Texas A&M University