Abstract

http://ssrn.com/abstract=1860998
 
 

Citations (9)



 


 



Have Rating Agencies Become More Conservative? Implications for Capital Structure and Debt Pricing


Ramin Baghai


Swedish House of Finance

Henri Servaes


London Business School; Centre for Economic Policy Research (CEPR)

Ane Tamayo


London School of Economics & Political Science (LSE)

July 22, 2013

Journal of Finance, Forthcoming

Abstract:     
We show that rating agencies have become more conservative in assigning credit ratings to corporations over the period 1985 to 2009. Holding firm characteristics constant, average ratings have dropped by three notches (e.g., from A to BBB ) over time. Consistent with the view that this change has not been fully warranted, we find that defaults for both investment grade and non-investment grade firms have declined over time. The increased stringency has also affected capital structure, cash holdings, growth, and debt spreads. Firms that suffer more from this conservatism issue less debt, have lower leverage, and hold more cash; they are also less likely to obtain a debt rating and they experience lower sales growth. However, their debt spreads are lower compared to the spreads of firms with the same rating that have not suffered from this conservatism, which implies that the market partly undoes the impact of conservatism on debt prices. This evidence suggests that firms and capital markets do not perceive the increase in conservatism to be fully warranted.

Number of Pages in PDF File: 63

Keywords: credit ratings, capital structure, debt issues, debt spreads

JEL Classification: G32

Accepted Paper Series





Download This Paper

Date posted: June 12, 2011 ; Last revised: July 22, 2013

Suggested Citation

Baghai, Ramin and Servaes, Henri and Tamayo, Ane, Have Rating Agencies Become More Conservative? Implications for Capital Structure and Debt Pricing (July 22, 2013). Journal of Finance, Forthcoming . Available at SSRN: http://ssrn.com/abstract=1860998 or http://dx.doi.org/10.2139/ssrn.1860998

Contact Information

Ramin Baghai
Swedish House of Finance ( email )
Drottninggatan 98
111 60 Stockholm
Sweden

Henri Servaes (Contact Author)
London Business School ( email )
Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
+44 20 7000 8268 (Phone)
+44 20 7000 8201 (Fax)
HOME PAGE: http://faculty.london.edu/hservaes/
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Ane Miren Tamayo
London School of Economics & Political Science (LSE) ( email )
Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)20 78494689 (Phone)
Feedback to SSRN


Paper statistics
Abstract Views: 1,159
Downloads: 299
Download Rank: 58,007
Citations:  9

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo7 in 0.344 seconds