Regulatory fragmentation and corporate credit ratings

Purpose This paper examines whether firm-level regulatory fragmentation is associated with corporate credit ratings. We also investigate three firm characteristics that moderate the association between regulatory fragmentation and credit ratings: compliance cost, managerial ability and resource capacity. Design/methodology/approach We use a firm-year regulatory fragmentation measure derived from textual analysis of the Federal Register. To mitigate endogeneity concerns, we apply propensity score matching and entropy balancing. As supporting evidence, we examine changes in credit ratings around the implementation of the Dodd–Frank Act. For the moderation analysis, we use interaction models. Findings Regulatory fragmentation is positively associated with corporate credit ratings. Moving from the 25th to the 75th percentile of regulatory fragmentation corresponds to a 0.278 higher credit rating, equivalent to 6.95% of the interquartile range of credit ratings. It also corresponds to a 6.19 percentage point higher probability of an investment-grade rating. This association varies with firm characteristics: it is less positive for firms with higher compliance costs and more positive for firms with higher managerial ability and higher resource capacity. Practical implications The association between regulatory fragmentation and credit ratings varies with a firm's capacity to absorb multi-agency oversight. Therefore, firms operating in fragmented regulatory environments may improve their credit ratings by reducing financial constraints, managing compliance costs efficiently and appointing and retaining high-ability management teams. Our findings also suggest that policymakers seeking to reduce regulatory multiplicity may consider firm-level variation, specifically firms with higher compliance costs and financial constraints. Originality/value This study provides the first evidence on the association between regulatory fragmentation and corporate credit ratings. Unlike existing studies using aggregate regulatory measures, we employ a firm-year measure capturing cross-sectional variation in regulatory multiplicity. We further document that this association varies with compliance costs, managerial ability and resource capacity, offering insight into how the structure of the regulatory environment shapes firms' credit ratings.