Do Credit Ratings Matter? Evidence from S&P's 2013 Methodology Revision

67 Pages Posted: 28 Sep 2018 Last revised: 30 Nov 2022

See all articles by Tim Liu

Tim Liu

University of Utah - David Eccles School of Business

Anil Shivdasani

University of North Carolina Kenan-Flagler Business School

Date Written: November 21, 2022

Abstract

Exploiting exogenous variation introduced by a significant change in S&P’s methodology, we show that the desire for credit rating preservation causes conservatism in capital structure and investment decisions. Using a novel measure to quantify debt capacity within a firm’s credit rating, we show that firms increase leverage in response to an exogenous relaxation of credit rating constraints. Ratings preservation constrains firms from pursuing optimal leverage and explains more variation in capital structure changes than other firm-specific determinants. The ratings channel is distinct from financial constraints used in the literature and has wide influence on financial policy.

Keywords: Credit Ratings, Capital Structure, Financial Policy

JEL Classification: G00, G24, G30, G32

Suggested Citation

Liu, Tim and Shivdasani, Anil, Do Credit Ratings Matter? Evidence from S&P's 2013 Methodology Revision (November 21, 2022). Available at SSRN: https://ssrn.com/abstract=3245633 or http://dx.doi.org/10.2139/ssrn.3245633

Tim Liu

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Anil Shivdasani (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-3182 (Phone)
919-962-2068 (Fax)

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