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