Managing for Ratings: Real Effects of a Corporate Ratings Criteria Change
41 Pages Posted: 7 Feb 2018 Last revised: 8 Mar 2023
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: Suggested Citation