Abstract

http://ssrn.com/abstract=1353327
 
 

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Citations (31)



 


 



Do Regulations Based on Credit Ratings Affect a Firm's Cost of Capital?


Darren J. Kisgen


Boston College - Carroll School of Management

Philip E. Strahan


Boston College - Department of Finance; National Bureau of Economic Research (NBER)

March 4, 2009

AFA 2010 Atlanta Meetings Paper

Abstract:     
In February 2003, the SEC officially certified a fourth credit rating agency, Dominion Bond Rating Service ("DBRS"), for use in bond investment regulations. After DBRS certification, bond yields change in the direction implied by the firm's DBRS rating relative to its ratings from other certified rating agencies. A one notch better DBRS rating corresponds to a 42 basis point reduction in a firm's debt cost of capital. The impact on yields is driven by cases where the DBRS rating is better than other ratings and is larger among bonds rated near the investment-grade cutoff. These findings indicate that ratings-based regulations on bond investment affect a firm's cost of debt capital.

Number of Pages in PDF File: 34

Keywords: Credit Ratings, Cost of Capital, SEC, Debt, Regulations, Capital Structure

JEL Classification: G12, G28, G32, G38

working papers series


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Date posted: March 5, 2009 ; Last revised: March 12, 2009

Suggested Citation

Kisgen, Darren J. and Strahan, Philip E., Do Regulations Based on Credit Ratings Affect a Firm's Cost of Capital? (March 4, 2009). AFA 2010 Atlanta Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1353327 or http://dx.doi.org/10.2139/ssrn.1353327

Contact Information

Darren J. Kisgen (Contact Author)
Boston College - Carroll School of Management ( email )
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
Philip E. Strahan
Boston College - Department of Finance ( email )
Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
617-552-6430 (Phone)
617-552-0431 (Fax)
HOME PAGE: http://www2.bc.edu/~strahan
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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