CREDIT RATINGS AND THE COST OF ISSUING SEASONED EQUITY

Garrett A. McBrayer

Journal of Financial Research, 2019, vol. 42, issue 2, 303-330

Abstract: I examine the effects of issuer credit ratings on the costs associated with seasoned equity offerings (SEOs). The evidence from a panel of SEOs from 1990 to 2014 shows that when firms issue seasoned equity, those with issuer credit ratings pay reduced investment banking fees. I confirm these results by conducting a propensity‐score matched‐sample comparison analysis of firms that obtain new, long‐term issuer credit ratings with an unrated control group. Controlling for known determinants of SEO fees, I find that firms that obtain a new credit rating before issuing seasoned equity pay significantly reduced investment banking fees. In economic terms, underwriting fees for newly rated firms are 7.2% lower than those for similar, yet unrated firms. Finally, I examine the indirect costs of issuance and find evidence that credit‐rated firms face reduced market‐based costs to issue. Rated firms incur lower dilutionary costs to issue and have more positive abnormal returns surrounding the issue.

Date: 2019
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