The impact of credit ratings on corporate behavior: Evidence from Moody's adjustments

Darren J. Kisgen

Journal of Corporate Finance, 2019, vol. 58, issue C, 567-582

Abstract: Moody's adjusts a firm's reported leverage across several dimensions to determine credit ratings. I find that changes to this adjustment methodology affect firm capital structure and investment decisions. In particular, in 2006, Moody's made several changes to its adjustment methodologies, which are arguably exogenous to changes in firm fundamentals. I show these changes significantly affect adjustments for firms in this year. I then show that these changes to adjustments in 2006 affect capital structure and investment decisions in 2007, especially for those firms with greatest exposure to the methodology changes. These results show that rating agencies have the power to affect corporate decisions.

Keywords: Credit ratings; Capital structure; Leverage; Debt (search for similar items in EconPapers)
JEL-codes: G21 G28 G31 G32 G33 G38 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:58:y:2019:i:c:p:567-582

DOI: 10.1016/j.jcorpfin.2019.07.002

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