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

35 Pages Posted: 7 Feb 2018 Last revised: 4 Mar 2020

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: February 20, 2020

Abstract

We exploit a change in criteria by Standard and Poor's to examine the real effects of an exogenous credit ratings change on corporate policies. We use a criteria recalibration by Standard and Poor's, unrelated to firms' fundamentals, as a quasi-natural experiment to analyze the impact of a ratings upgrade on issuance activity, investment rate, cash holdings, and payout policy of companies. Our findings suggest that upgraded firms subsequently issue more debt relative to equity, increase their investment rate, and decreasing their cash holdings. We find limited evidence that firms increase their payout to shareholders. In addition we find upgraded firms issue public bonds at lower yields. 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 (February 20, 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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