Managing for Ratings: Real Effects of a Corporate Ratings Criteria Change

41 Pages Posted: 7 Feb 2018 Last revised: 8 Mar 2023

See all articles by Emmanuel Alanis

Emmanuel Alanis

Texas State University

Janet D. Payne

Texas State University, San Marcos - Department of Finance and Economics

Joerg Picard

Grand Valley State University

Date Written: July 24, 2020

Abstract

We exploit a criteria change by Standard and Poor's (S&P) to examine the real effects of a
credit ratings change. Using a recalibration by S&P, unrelated to firms' fundamentals, as a
quasi-natural experiment we analyze the impact of a ratings upgrade on issuance activity,
investment, cash holdings, and payout policy of companies. Our findings suggest upgraded firms subsequently issue more debt relative to equity, enjoy lower debt yields, and increase their investment rate and share repurchases. We find limited evidence upgraded firms decrease their cash holdings. Our results support the view that credit ratings have a real effect on corporations.

Keywords: Credit rating, Corporate investment

JEL Classification: G30, G31

Suggested Citation

Alanis, Emmanuel and Payne, Janet D. and Picard, Joerg, Managing for Ratings: Real Effects of a Corporate Ratings Criteria Change (July 24, 2020). Available at SSRN: https://ssrn.com/abstract=3112959

Emmanuel Alanis (Contact Author)

Texas State University ( email )

San Marcos, TX 78666
United States

Janet D. Payne

Texas State University, San Marcos - Department of Finance and Economics ( email )

San Marcos, TX 78666
United States

Joerg Picard

Grand Valley State University ( email )

Seidman School of Business
1 Campus Drive
Allendale, MI 49401
United States
+1-616-331-7404 (Phone)

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