Credit rating and managerial behavior in investment decision making: Evidence from the Korean market
Seonhyeon Kim,
Ephraim Kwashie Thompson and
Changki Kim
Journal of Behavioral and Experimental Finance, 2023, vol. 37, issue C
Abstract:
This study finds, using data from Korea that, as rating levels for corporate bonds improve, firms tend to increase capital investment, but this positive relationship is attenuated at or near-BBB ratings. At the upper end of speculative grade, there is an incentive to make active investment decisions because of the opportunity to be upgraded to investment grade. This paper found that BB+ firms show such behavior. Conversely, at the lower end of investment grade, there is an incentive to make conservative investment decisions due to the threat of a downgrade to speculative grade. Thus, the threat of a downgrade to speculative-grade provides managers conservative investment decision incentives. The greater the threat, the stronger the impact of investment-grade cut-offs. This paper is an early study to explore how investment-grade cut-offs affect managerial behavior in investment decision-making.
Keywords: Credit rating; Investment decision; Managerial behavior; Investment-grade cut-offs; Overinvestment (search for similar items in EconPapers)
JEL-codes: G24 G31 G32 G40 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:beexfi:v:37:y:2023:i:c:s2214635023000059
DOI: 10.1016/j.jbef.2023.100791
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