Firms with AAA ratings are disappearing. In 1985 there were 39 firms with a AAA rating and now there are 4. Furthermore, this trend is equally apparent when considering all high investment grade corporate debt (AAA and AA): between 1985 and 2010 the number of firms rated AAA or AA has dropped by 70%. Over the same period the number of firms issuing low investment grade debt (A and BBB) has increased by 77% and those issuing speculative grade debt has increased by 129%. Obvious causes for this trend, such as firms simply becoming "riskier" or an increase in the rate at which firms merge, are dismissed.
To determine why the distribution of firm ratings has changed so dramatically I build a model of investment by firms that includes a passive debt rating agency and investors that have access to an informative signal about the reliability of a firm (i.e. how likely the firm is to default). Using bond data from the Mergent Fixed Income Securities Database I am able to test the following conjectures. The first is that the composition of investors is changing in a way that increases demand for debt issued by lower-rated firms. The second is that the signal of firm quality or reliability is now less costly to interpret or, alternatively, is now more informative.  This story captures the increase in access to financial information over the last 20 or so years.