Do Regulations Based on Credit Ratings Affect a Firm&Apos;S Cost of Capital?

36 Pages Posted: 20 Apr 2009 Last revised: 9 Sep 2021

See all articles by Darren J. Kisgen

Darren J. Kisgen

Boston College - Carroll School of Management

Philip E. Strahan

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2009

Abstract

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 39 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.

Suggested Citation

Kisgen, Darren J. and Strahan, Philip E., Do Regulations Based on Credit Ratings Affect a Firm&Apos;S Cost of Capital? (April 2009). NBER Working Paper No. w14890, Available at SSRN: https://ssrn.com/abstract=1391837

Darren J. Kisgen

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Philip E. Strahan (Contact Author)

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
617-552-6430 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://www2.bc.edu/~strahan

National Bureau of Economic Research (NBER)

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