Corporate risk-taking after changes in credit rating

Hardjo Koerniadi

International Journal of Managerial Finance, 2021, vol. 19, issue 1, 48-62

Abstract: Purpose - The paper aims to investigate corporate risk-taking following changes in firms' credit ratings (CR)and the mechanisms the firms use in implementing the risk-taking. Design/methodology/approach - The paper employs fixed-effect regression models to examine risk-taking behaviour after firms experience changes inCRafter their ratings are downgraded to the lower edge of the investment grade rating (i.e. BBB-) and after theirCRs are downgraded below the investment rating. Findings - The paper finds that, whilst in general, changes inCRare negatively associated with post-event risk-taking, firms downgraded to BBB- do not increase their risk-taking. Only when firms are rated below this grade, firms significantly increase their risk-taking, suggesting that the association between downgrades inCRand firm risk-taking following the event is not linear. Further analysis suggests that these downgraded firms do not increase research and development (R&D) expenses or capital expenditures but employ long-term debt as their risk-taking mechanism. Practical implications - The findings of the paper have practical implications for investors considering investing in downgraded-rating firms to shareholders of such firms and especially to those overseeing the firms' risk-taking policies. Originality/value - The study fills the gap in the literature by providing empirical evidence on corporate risk-taking after changes inCRand also contributes to the optimal debt-maturity choice literature.

Keywords: Risk-taking; Credit rating; Behavioural theory of firm; Asset substitution theory; Leverage (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijmfpp:ijmf-07-2021-0331

DOI: 10.1108/IJMF-07-2021-0331

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