The Real Costs of Corporate Credit Ratings

56 Pages Posted: 4 Mar 2014 Last revised: 11 Aug 2015

Taylor A. Begley

Washington University in St. Louis - John M. Olin Business School; London Business School

Date Written: August 11, 2015

Abstract

Credit rating agencies emphasize the importance of specific financial ratio thresholds in their rating process. Firms below these thresholds are more likely to receive higher ratings than similar firms that are not. I show that firms near key Debt/EBITDA thresholds are significantly more likely to reduce R\&D and SG\&A expenditures (boosting EBITDA) prior to bond issuance compared to observationally similar firms not near a threshold. Subsequently, they are more likely to experience declines in patent productivity, profitability, and Tobin's Q. These distortions highlight an important cost of arm's-length financing and an adverse consequence of transparency in credit rating criteria.

Keywords: credit ratings, transparency, real distortions

JEL Classification: G31

Suggested Citation

Begley, Taylor A., The Real Costs of Corporate Credit Ratings (August 11, 2015). Paris December 2014 Finance Meeting EUROFIDAI - AFFI Paper. Available at SSRN: https://ssrn.com/abstract=2404290 or http://dx.doi.org/10.2139/ssrn.2404290

Taylor A. Begley (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

HOME PAGE: http://www.taylorbegley.com

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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