The Real Effects of Credit Ratings: Evidence from Corporate Asset Sales

78 Pages Posted: 10 Nov 2016 Last revised: 23 Jun 2017

See all articles by Dion Bongaerts

Dion Bongaerts

Erasmus University Rotterdam (EUR) - Finance

Frederik P. Schlingemann

University of Pittsburgh - Finance Group; Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM)

Date Written: June 22, 2017

Abstract

When credit rating agencies (CRAs) downgrade corporate debt, they may inadvertently aggravate credit constraints, but may also act as dedicated monitors who implicitly impose discipline on management to improve the allocation of productive assets. We investigate which, if any, effect dominates. Following downgrades, firms are more likely to conduct asset sales, particularly those with the self-reported purpose to pay down outstanding debt or raise cash. Downgrades affect the likelihood of asset sales to a much lesser extent when the purpose is to concentrate on core assets or to sell underperforming operations and do not affect the likelihood of non-cash generating spinoffs. Stock price reactions to asset sales following a downgrade suggest that sellers aim to relax credit constraints whereas buyers benefit from cash-in-the-market prices. Asset sales following downgrades are concentrated in segments with the highest liquidity, generate the lowest current cash flows, and have the most growth opportunities. Peer-based and intra-firm performance rank or relatedness to core activities, do not explain the choice of divested segments. Our results suggest that asset sales are a likely response to credit rating downgrades and aim to relax credit constraints, not to improve the allocation of the firm’s assets.

Keywords: Credit Ratings, Asset Sales, Financial Distress, Governance

JEL Classification: G34

Suggested Citation

Bongaerts, Dion and Schlingemann, Frederik Paul, The Real Effects of Credit Ratings: Evidence from Corporate Asset Sales (June 22, 2017). Available at SSRN: https://ssrn.com/abstract=2866484 or http://dx.doi.org/10.2139/ssrn.2866484

Dion Bongaerts

Erasmus University Rotterdam (EUR) - Finance ( email )

Burgemeester Oudlaan 50
Rotterdam, 3062PA
Netherlands
+31 (0) 10 40 82 790 (Phone)
+31 (0) 10 40 89 017 (Fax)

HOME PAGE: http://www.rsm.nl/portal/page/portal/home/faculty/academic_departments/finance/faculty_and_staff/fac

Frederik Paul Schlingemann (Contact Author)

University of Pittsburgh - Finance Group ( email )

368A Mervis Hall
Pittsburgh, PA 15260
United States
(412) 648 1847 (Phone)
(412) 648 1693 (Fax)

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

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