Credit ratings and firm innovation: Evidence from sovereign downgrades

Rui Wang and Shijie Yang

Journal of Banking & Finance, 2023, vol. 148, issue C

Abstract: This study investigates the relationship between credit ratings and firm innovation activities using a cross-country sample over the 1995–2020 period. Exploiting the setting of rating agencies’ sovereign ceiling policies, our main analysis shows that a one-notch reduction in corporate credit ratings engendered by sovereign downgrades, on average, leads to a 5.90% reduction in research and development (R&D) spending. We identify the substitution of external acquisitions for internal expenditures and the increase in creditor control as the underlying mechanisms of the causal relation. Moreover, the negative impact of credit rating downgrades on R&D investment results in deterioration in patent output and firm performance. The cross-sectional analysis shows that the observed effects on innovation and firm performance are concentrated in firms with higher external finance dependence or more growth options.

Keywords: Credit ratings; Corporate innovation; Sovereign rating downgrade; Creditor control; Mergers and acquisitions (search for similar items in EconPapers)
JEL-codes: G21 G24 G32 G34 H63 O30 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:148:y:2023:i:c:s0378426622002990

DOI: 10.1016/j.jbankfin.2022.106719

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