Do Firms Obtain Multiple Ratings to Hedge against Downgrade Risk?
European Finance Association Annual Meeting, 2011
53 Pages Posted: 16 Mar 2012 Last revised: 15 Aug 2017
Date Written: August 7, 2017
Utilizing an influential event, the 2005 Lehman index rule change, we examined the role of multiple bond ratings in corporate hedging. We find that U.S. firms exhibit a sharp increase in their demand for a third Fitch rating after the Lehman event, with the pattern particularly significant for investment-grade bonds and for those bonds near a rating downgrade. In fact, firms that acquire a third rating are more likely to experience a downgrade in their existing two ratings in the future. Furthermore, open-ended mutual funds increase their holdings of three-rating bonds after the event, and institutional investors trade three-rating bonds more actively. These findings show that firms use multiple ratings to maintain stable rating status, which helps both firms and investors avoid the costly consequences of rating downgrades.
Keywords: Credit rating agency; Multiple ratings; Corporate hedge; Institutional investor; Bond holding; Bond liquidity
JEL Classification: G14, G23, G24
Suggested Citation: Suggested Citation