Corporate Financing and Anticipated Credit Rating Changes
46 Pages Posted: 12 Nov 2013 Last revised: 7 Apr 2016
Date Written: March 10, 2016
Firm circumstances change but rating agencies may not make timely revisions to their ratings, thereby increasing information asymmetry between firms and the market. We examine whether firms time the securities market before a credit rating agency publicly reveals its decision to change a firm's credit rating. Using quarterly data, we show that firms adjust their financing structures before credit rating downgrades are publicly revealed. Specifically, firms on average increase their debt financing by 1.29% before the disclosure of a rating downgrade, and this increase is due to the issuance of debt rather than the repurchase of equity. In contrast, firms do not take significant financing actions before credit rating upgrades.
Keywords: Credit rating changes, Information asymmetry, Capital structure
JEL Classification: G24, G32
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