Corporate Financing and Anticipated Credit Rating Changes

46 Pages Posted: 12 Nov 2013 Last revised: 7 Apr 2016

See all articles by Chi-Hsiou Daniel Hung

Chi-Hsiou Daniel Hung

University of Glasgow - Adam Smith Business School

Anurag Narayan Banerjee

Durham Business School

Qingrui Meng

Durham University

Date Written: March 10, 2016

Abstract

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

Suggested Citation

Hung, Chi-Hsiou Daniel and Banerjee, Anurag Narayan and Meng, Qingrui, Corporate Financing and Anticipated Credit Rating Changes (March 10, 2016). Review of Quantitative Finance and Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2353043 or http://dx.doi.org/10.2139/ssrn.2353043

Chi-Hsiou Daniel Hung (Contact Author)

University of Glasgow - Adam Smith Business School ( email )

Gilbert Scott Building
University of Glasgow
Glasgow, Scotland G12 8QQ
United Kingdom

Anurag Narayan Banerjee

Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

Qingrui Meng

Durham University ( email )

Old Elvet
Mill Hill Lane
Durham, Durham DH1 3HP
United Kingdom

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