Abstract

http://ssrn.com/abstract=2135483
 


 



Do Credit Ratings Affect Firm Investments? The Monitoring Role of Rating Agencies


Christina E. Bannier


Johannes Gutenberg-University Mainz

Christian W. Hirsch


University of Frankfurt; Goethe University Frankfurt - House of Finance

M. Wiemann


Frankfurt School of Finance & Management

July 17, 2012


Abstract:     
Agency conflicts may induce managers to choose inefficiently risky investment projects that benefit stockholders at the expense of debtholders. While private debt contracts often contain covenants restricting investment choices, public debt rarely does. We therefore examine whether credit rating agencies exercise a disciplining function on behalf of the bondholders. We show that, indeed, firms reduce (raise) their investment rates around negative (positive) rating events. This investment reaction is independent of changes in performance, investment opportunities, capital costs, or target rating strategies. It is strongest for firms with high agency conflicts. We also demonstrate that increasing competition among credit rating agencies reduces the monitoring effect. Higher rating competition, fostered by regulatory action, might therefore harm the beneficial and so far unrecognized real impact of the industry.

Number of Pages in PDF File: 40

Keywords: Credit rating, agency conflicts, investment, monitoring, rating competition

JEL Classification: G24, G32

working papers series


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Date posted: August 25, 2012  

Suggested Citation

Bannier, Christina E. and Hirsch, Christian W. and Wiemann, M., Do Credit Ratings Affect Firm Investments? The Monitoring Role of Rating Agencies (July 17, 2012). Available at SSRN: http://ssrn.com/abstract=2135483 or http://dx.doi.org/10.2139/ssrn.2135483

Contact Information

Christina E. Bannier (Contact Author)
Johannes Gutenberg-University Mainz ( email )
Jakob-Welder-Weg 9
Mainz, 55128
Germany
Christian W. Hirsch
University of Frankfurt ( email )
Grüneburgplatz 1
Frankfurt am Main, 60323
Germany
+49 69 798 33704 (Phone)
+49 69 798 33901 (Fax)
Goethe University Frankfurt - House of Finance ( email )
Grüneburgplatz 1
Frankfurt am Main, 60323
Germany
M. Wiemann
Frankfurt School of Finance & Management ( email )
Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany
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