MANAGING FOR RATINGS: REAL EFFECTS OF A CORPORATE RATINGS CRITERIA CHANGE

Emmanuel Alanis, Janet Payne and Joerg Picard

Journal of Financial Research, 2020, vol. 43, issue 4, 821-845

Abstract: We exploit a criteria change by Standard & Poor's (S&P) to examine the real effects of a credit ratings change. Using a recalibration by S&P, unrelated to firms’ fundamentals, as a quasi‐natural experiment we analyze the impact of a ratings upgrade on the issuance activity, investment, cash holdings, and payout policy of companies. Our findings suggest upgraded firms subsequently issue more debt relative to equity, enjoy lower debt yields, and increase their investment rate and share repurchases. We find limited evidence that upgraded firms decrease their cash holdings. Our results support the view that credit ratings have a real effect on corporations.

Date: 2020
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https://doi.org/10.1111/jfir.12226

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