Regulation fair disclosure's effect on the information content of bond rating changes

The SEC implemented Regulation Fair Disclosure (Reg FD) in 2000. Reg FD requires firms to release material information to everyone simultaneously, thereby reducing information asymmetry between favoured stock analysts and others. Bond rating agencies were exempt from Reg FD in order to continue receiving the private firm information necessary for accurate credit default assessments. The exemption, if valuable to the bond market, should have resulted in an increase in the relative importance of bond rating changes on bond yield premia when Reg FD was implemented. In the first empirical study on the impact of Reg FD on the bond markets, we explore this hypothesis by measuring bond yield premia reactions to bond rating changes around the implementation of Reg FD.

For downgrades, we find the impact of Reg FD is related to firm size. The smallest firms experienced a significantly weaker bond yield premia response. The evidence for the relevance of Reg FD for upgrades is weak. Contrary to concerns from the Bond Market Association, it appears Reg FD lessened the impact of downgrades on the smallest firms, and did not affect speculative-grade bonds or bonds with higher debt levels.