Topic: Securities Ratings and Information Provision
Speaker: Carola Frydman, Professor of Finance, Kellogg School of Management, Northwestern University
Date: September 29, 2021 (Wednesday)
Time: 10:00-11:30
Location: 4-101
Language: English
Abstract:
We examine the introduction in 1909 of letter-graded ratings for corporate securities. These inaugural securities ratings (ISRs) had no regulatory implications and were predictable using publicly available information. Despite this, we find that lower than market-implied ISRs caused a sudden rise in secondary market bond yields. Instrumenting for receiving any rating at all using the publisher’s propensity to provide ratings for even small securities in large entities, we find that access to ISRs substantially reduces bid-ask spreads, consistent with reduced information asymmetries, improved liquidity, and functioning of these markets. These results indicate that a simple coarse set of ratings can improve information transmission, even in settings with the highest monetary stakes and well-incentivized participants, and highlights the potential innate value of ratings in financial markets.
About the Speaker:
Carola Frydman is the Harold L. Stuart Chair and a Professor of Finance at the Kellogg School of Management. Professor Frydman's research focuses on American business and financial history. Recent research projects examine the evolution of financial markets during the early twentieth century, with special emphasis on the role of financial intermediaries for firm growth, and on financial crises. She has also studied the long-run trends in executive compensation, the market for managers, and corporate governance. Her work has been published at journals such as the American Economic Review, the Journal of Political Economy, the Journal of Financial Economics, and the Journal of Economic History, and featured in The Wall Street Journal, the New York Times, and The Economist. She is the Co-Editor in Chief of Explorations in Economic History, and is on the board of the Review of Financial Studies, and of the Review Studies in Corporate Finance. Prior to joining Kellogg, Professor Frydman was an Assistant Professor of Finance at the MIT Sloan School of Management (2006-2011) and an Assistant Professor of Economics at Boston University (2011-2016). She holds a Ph.D. in Economics from Harvard University, and B.A. and M.A. degrees in Economics from Universidad de San Andres, Argentina, and is a Research Associate at the National Bureau of Economic Research.
