Are Credit Rating Agencies Still Relevant? Evidence on Certification from Moody's Credit Watches

Journal of Corporate Finance, Forthcoming

66 Pages Posted: 2 Aug 2016 Last revised: 3 Aug 2016

See all articles by Hamdi Driss

Hamdi Driss

Saint Mary's University

Nadia Massoud

Melbourne Business School, University of Melbourne

Gordon S. Roberts

York University - Schulich School of Business

Date Written: June 1, 2016

Abstract

We show that a rating agency can provide certification for corporate borrowers through the mechanism of a credit watch with direction downgrade. We find that firms with watch-preceded rating confirmations (firms for which original ratings are confirmed after a credit watch warning) experience an increase in their long-term debt financing and ramp up their investment activities following the credit watch period. These firms are able to maintain their profitability from before to after the watch period, while we find no such evidence for firms with watch-preceded rating downgrades. Among firms with confirmed ratings, those with less access to credit markets obtain more long-term debt financing at a lower cost of debt capital only in the post-watch period, indicating that rating agencies can help alleviate firm capital constraints. The certification effects persist after controlling for potential endogeneity bias.

Keywords: Credit Rating Agency, Credit Watch, Certification, Corporate Outcomes

JEL Classification: G24, G32

Suggested Citation

Driss, Hamdi and Massoud, Nadia and Roberts, Gordon S., Are Credit Rating Agencies Still Relevant? Evidence on Certification from Moody's Credit Watches (June 1, 2016). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2817162

Hamdi Driss (Contact Author)

Saint Mary's University ( email )

923 Robie St.
Saint Mary's University - FISMS
Halifax, Nova Scotia B3H 3C3
Canada

HOME PAGE: http://Hamdi.Driss@smu.ca

Nadia Massoud

Melbourne Business School, University of Melbourne ( email )

200 Leicester Street
Carlton, Victoria 3053 3186
Australia
+61 3 9349 8130 (Phone)
+61 3 9349 8136 (Fax)

HOME PAGE: http://mbs.edu/facultyresearch/facultydirectory/Pages/NadiaMassoud.aspx

Gordon S. Roberts

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100 x77953 (Phone)
416-736-5687 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
81
Abstract Views
459
rank
314,489
PlumX Metrics