Download this Paper Open PDF in Browser

The Real Effects of Credit Ratings: The Sovereign Ceiling Channel

75 Pages Posted: 3 Nov 2013 Last revised: 5 Oct 2017

Heitor Almeida

University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Igor Cunha

University of Kentucky

Miguel A. Ferreira

Nova School of Business and Economics; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Felipe Restrepo

University of Western Ontario - Richard Ivey School of Business

Date Written: January 8, 2016

Abstract

We show that sovereign debt impairments can have a significant impact on financial markets and real economies through a credit ratings channel. Specifically, we find that firms reduce their investment and reliance on credit markets due to a rising cost of debt capital following a sovereign rating downgrade. We identify these effects by exploiting exogenous variation on corporate ratings due to rating agencies' sovereign ceiling policies that require firms' ratings to remain at or below the sovereign rating of their country of domicile.

Keywords: Credit ratings, Sovereign bonds, Sovereign ceiling, Cost of capital, Investment, Capital structure

JEL Classification: G24, G28, G31, G32, H63

Suggested Citation

Almeida, Heitor and Cunha, Igor and Ferreira, Miguel A. and Restrepo, Felipe, The Real Effects of Credit Ratings: The Sovereign Ceiling Channel (January 8, 2016). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2349051 or http://dx.doi.org/10.2139/ssrn.2349051

Heitor Almeida

University of Illinois at Urbana-Champaign ( email )

515 East Gregory Drive
4037 BIF
Champaign, IL 61820
United States
217-3332704 (Phone)

HOME PAGE: http://www.business.illinois.edu/FacultyProfile/faculty_profile.aspx?ID=11357

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Igor Cunha (Contact Author)

University of Kentucky ( email )

Gatton College of Business and Economics
550 S. Limestone
Lexington, KY 40526
United States
859-257-5703 (Phone)

Miguel Ferreira

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Felipe Restrepo

University of Western Ontario - Richard Ivey School of Business ( email )

1255 Western Road
London, Ontario N6G 0N1
Canada

HOME PAGE: http://www.ivey.uwo.ca/faculty/directory/felipe-restrepo/

Paper statistics

Downloads
1,131
Rank
14,907
Abstract Views
4,783