The Impact of Credit Ratings on Corporate Behavior: Evidence from Moody's Adjustments

40 Pages Posted: 9 May 2012 Last revised: 24 Sep 2018

See all articles by Darren J. Kisgen

Darren J. Kisgen

Boston College - Carroll School of Management

Date Written: September 14, 2018

Abstract

Moody’s adjusts a firm’s reported leverage across several dimensions to determine credit ratings. I find that changes to this adjustment methodology affect firm capital structure and investment decisions. In particular, in 2006, Moody’s made several changes to its adjustment methodologies, which are arguably exogenous to changes in firm fundamentals. I first show these changes significantly affected adjustments for firms in this year. I then show that these changes to adjustments in 2006 affect capital structure and investment decisions in 2007, especially for those firms most affected by these methodology changes. These results show that rating agencies have the power to affect corporate decisions.

Keywords: Credit Ratings, Real Effects, Leverage, Capital Structure, Debt

JEL Classification: G21, G28, G31, G32, G33, G38

Suggested Citation

Kisgen, Darren J., The Impact of Credit Ratings on Corporate Behavior: Evidence from Moody's Adjustments (September 14, 2018). Available at SSRN: https://ssrn.com/abstract=2054816 or http://dx.doi.org/10.2139/ssrn.2054816

Darren J. Kisgen (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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