The Real Costs of Corporate Credit Ratings

Taylor A. Begley

London Business School

October 20, 2014

Paris December 2014 Finance Meeting EUROFIDAI - AFFI Paper

Credit rating agencies emphasize the importance of specific financial ratio thresholds in their rating process. Firms on the favorable side of these thresholds are more likely to receive higher ratings than similar firms that are not. I show that firms near these salient thresholds respond to the incentive to improve their appearance on this dimension by distorting real investment activities during periods leading up to bond issuance. These firms are significantly more likely to reduce R&D and SG&A expenditures compared to observationally similar firms not near a threshold. Subsequently, they are more likely to experience declines in innovation output, profitability, and Tobin's Q. These distortions highlight an important cost of arms-length financing and an adverse consequence of transparency in credit rating criteria.

Number of Pages in PDF File: 55

Keywords: credit ratings, transparency, real distortions

JEL Classification: G31

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Date posted: March 4, 2014 ; Last revised: October 26, 2014

Suggested Citation

Begley, Taylor A., The Real Costs of Corporate Credit Ratings (October 20, 2014). Paris December 2014 Finance Meeting EUROFIDAI - AFFI Paper. Available at SSRN: http://ssrn.com/abstract=2404290 or http://dx.doi.org/10.2139/ssrn.2404290

Contact Information

Taylor A. Begley (Contact Author)
London Business School ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
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