Do Rating Agencies Apply Standards Consistently? Coarseness in Ratings around the Dodd-Frank Act

We examine whether rating analysts apply rating standards consistently over time and in response to regulatory events. We estimate a rating prediction model based on observable economic characteristics and use the dispersion of predicted ratings as a measure of rating coarseness. We find that ratings are more uniformly assigned after the passage of the Dodd-Frank Act, that is, rating categories comprise firms with more similar risk characteristics after rating agencies face greater legal liability. A cost of a more mechanical mapping of firm characteristics into ratings is the loss of information conveyed by ratings. However, the difference between actual ratings and predicted ratings remains informative about credit risk after the Dodd-Frank Act.