Cavallo, Eduardo A.; Powell, Andrew; Rigobón, Roberto (2008) examine whether credit rating agencies add value in the sovereign debt market. They analyze the information content of credit ratings and spreads, arguing that ratings provide additional information beyond what is captured in spreads. Using high-frequency data and event studies, they find that ratings significantly influence macroeconomic variables such as stock market indices, exchange rates, and spreads. The study shows that rating changes, especially those that are less anticipated, have a more significant impact on these variables. The results suggest that credit rating agencies do add value, and their opinions are important for market functioning. The paper also highlights the challenges in testing the value of ratings due to the difficulty in distinguishing between anticipated and unanticipated rating changes. Overall, the findings indicate that ratings are informative and that the credit rating market is a public policy concern. The study uses a specification test and error-correction model to evaluate the informational content of ratings, finding that they are not a sufficient statistic for spreads. The results are robust across different specifications and data windows, reinforcing the conclusion that credit rating agencies add value.Cavallo, Eduardo A.; Powell, Andrew; Rigobón, Roberto (2008) examine whether credit rating agencies add value in the sovereign debt market. They analyze the information content of credit ratings and spreads, arguing that ratings provide additional information beyond what is captured in spreads. Using high-frequency data and event studies, they find that ratings significantly influence macroeconomic variables such as stock market indices, exchange rates, and spreads. The study shows that rating changes, especially those that are less anticipated, have a more significant impact on these variables. The results suggest that credit rating agencies do add value, and their opinions are important for market functioning. The paper also highlights the challenges in testing the value of ratings due to the difficulty in distinguishing between anticipated and unanticipated rating changes. Overall, the findings indicate that ratings are informative and that the credit rating market is a public policy concern. The study uses a specification test and error-correction model to evaluate the informational content of ratings, finding that they are not a sufficient statistic for spreads. The results are robust across different specifications and data windows, reinforcing the conclusion that credit rating agencies add value.