Have Rating Agencies Become More Conservative? Implications for Capital Structure and Debt Pricing

47 Pages Posted: 25 Jun 2011

See all articles by Ramin Baghai

Ramin Baghai

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Henri Servaes

London Business School; Centre for Economic Policy Research (CEPR)

Ane Tamayo

London School of Economics & Political Science (LSE)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2011

Abstract

We document that rating agencies have become more conservative in assigning ratings to corporate bonds over the period 1985 to 2009. Holding firm characteristics constant, average ratings have dropped by 3 notches (e.g., from A+ to BBB+) over time. This increased stringency has affected both capital structure and debt spreads. Firms that suffer most from this conservatism issue less debt and have lower leverage. However, their debt spreads are lower compared to the spreads of firms that have not suffered from this conservatism, which implies that the market partly undoes the impact of conservatism on debt prices. This evidence suggests that firms and capital markets do not perceive that the increase in conservatism is fully warranted.

Keywords: Capital structure, Credit ratings, Debt issues, Debt spreads

JEL Classification: G32

Suggested Citation

Baghai, Ramin and Servaes, Henri and Tamayo, Ane Miren, Have Rating Agencies Become More Conservative? Implications for Capital Structure and Debt Pricing (June 2011). CEPR Discussion Paper No. DP8446, Available at SSRN: https://ssrn.com/abstract=1871557

Ramin Baghai (Contact Author)

Stockholm School of Economics ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Henri Servaes

London Business School ( email )

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HOME PAGE: http://faculty.london.edu/hservaes/

Centre for Economic Policy Research (CEPR)

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Ane Miren Tamayo

London School of Economics & Political Science (LSE) ( email )

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