Financial Reporting Consequences of Expanded Regulation of Credit Rating Agencies in the Dodd-Frank Act

SYNOPSIS The Dodd-Frank Act expanded regulation of credit rating agencies (CRAs) and compelled them to tighten rating standards. We investigate how the stricter standards affect issuers’ financial reporting practices. On one hand, issuers may be more likely to engage in financial reporting manipulations to maintain their credit ratings. On the other hand, increased due diligence by CRAs may prompt issuers to report honestly. We find that the Act increases the likelihood of issuers’ meeting analyst forecasts and avoiding reporting internal control weaknesses. This effect is more salient for issuers with higher debt dependence and higher costs of real activities management and weaker for issuers with higher costs of reporting manipulation. We find some evidence that these reporting maneuvers help prevent rating downgrades. Overall, we document the causal effect of credit rating market dynamics on corporate reporting incentives, and our study informs an unintended consequence of the Act. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M48; M42; M41; M40.