 Do firms obtain multiple ratings to hedge against downgrade risk?Zhihua Chen and Zhen Wang Journal of Banking & Finance, 2021, vol. 123, issue C Abstract: Utilizing the 2005 Lehman index rule change, we examine the role of multiple bond ratings in corporate hedging. We find an asymmetric pattern for firms near a rating downgrade and those near an upgrade. Specifically, firms near a downgrade right before the Lehman event display a strong demand for a third Fitch rating shortly after it, whereas those near an upgrade do not. More than 75% of the firms that would have been effectively downgraded ex post rightfully acquired a third Fitch rating ex ante. This decision prevents 67% of these firms from being downgraded from their original broad rating categories. Furthermore, having a third rating is attractive to investors only for bonds near a downgrade. Investors increase the holdings of these bonds and trade them more actively after the Lehman event. These results suggest that firms use multiple ratings to hedge against downgrade risk. Keywords: Credit rating agency; Multiple ratings; Corporate hedge; Institutional investor; Bond holding; Bond liquidity (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:123:y:2021:i:c:s0378426620302685 DOI: 10.1016/j.jbankfin.2020.106006 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.