The Mitigating Effect of Bank Financing on Shareholder Value and Firm Policies Following Rating Downgrades

45 Pages Posted: 22 Jun 2016 Last revised: 27 Nov 2017

See all articles by Mascia Bedendo

Mascia Bedendo

University of Bologna - Department of Management

Linus Siming

Free University of Bozen-Bolzano - Faculty of Economics and Management

Date Written: December 13, 2016

Abstract

We document that shareholders of high-yield firms are less sensitive to credit rating downgrades the higher the proportion of bank financing in the firm. This positive effect is linked to firm behavior. In the year after the downgrade, high-yield firms with large bank debt ratios i) need to reduce their leverage less, and ii) display higher capital expenditures, compared to peers that rely relatively more on other sources of debt. Bank financing thus helps alleviate the adverse effects of rating downgrades on shareholders and firms in the high-yield segment. As such, one may view our findings as new evidence of the “specialness” and flexibility of bank debt.

Keywords: Credit rating agencies; Market reaction; Debt structure

JEL Classification: G14; G24; G32

Suggested Citation

Bedendo, Mascia and Siming, Linus, The Mitigating Effect of Bank Financing on Shareholder Value and Firm Policies Following Rating Downgrades (December 13, 2016). BAFFI CAREFIN Centre Research Paper No. 2016-22, Journal of Corporate Finance, Vol. 48, No. February, 2018, Available at SSRN: https://ssrn.com/abstract=2799213 or http://dx.doi.org/10.2139/ssrn.2799213

Mascia Bedendo (Contact Author)

University of Bologna - Department of Management ( email )

Via Capo di Lucca 34
Bologna, Bologna 40126
Italy

Linus Siming

Free University of Bozen-Bolzano - Faculty of Economics and Management ( email )

Via Sernesi 1
39100 Bozen-Bolzano (BZ), Bozen 39100
Italy

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