The Value of Ratings: Evidence from Their Introduction in Securities Markets

Abstract

We study the first-ever ratings for corporate securities. In 1909, John Moody published a book that partitioned the majority of listed railroad bonds into letter-graded ratings. These ratings had no regulatory implications and were largely explainable using publicly available information. We find that lower-than-market-implied ratings caused a rise in secondary market bond yields and that bonds that were rated experienced a substantial decline in their bid-ask spreads, consistent with reduced information asymmetries and improved liquidity. Our findings suggest that ratings can improve information transmission and highlight their potential value for the functioning of financial markets.