The Direct and Indirect Effects of Rating-Contingent Basel Regulations on Financing of Firms: Global Evidence

65 Pages Posted: 30 Jul 2018

See all articles by Balagopal Gopalakrishnan

Balagopal Gopalakrishnan

Indian Institute of Management Kozhikode

Joshy Jacob

Indian Institute of Management (IIM), Ahmedabad

Sanket Mohapatra

Indian Institute of Management Ahmedabad

Date Written: July 30, 2018

Abstract

We empirically examine how the rating-contingent Basel regulations impact the access and cost of debt for firms with varying characteristics around the world, and investigate how firms cope with the impact through alternative financing sources and adjustments to its capital investments. We find that the implementation of the rating-contingent regulations has a significant impact on the flow of credit and the cost of credit, particularly to the low rated firms. The results indicate that the access to debt financing has become more difficult for the lower rated firms. Firms mitigate the shortage in bank credit induced by the regulation, through a combination of higher trade credit, lower payouts and downward adjustment of their capital investments. Particularly, firms in the lower quartile of the credit rating distribution substitute the reduced bank credit with increased reliance on accounts payables. Such firms have also lowered their payouts to shareholders, in an effort to maintain the liquidity and capital needs. We also find that the lower rated firms have significant decline in their capital investment growth in the post Basel period, implying an active response to the deterioration in the access to credit. Our key results are robust to alternative estimations and are also confirmed by a smaller sample of firms in the loan-level data on syndications. The findings of the paper substantially contribute to the understanding of the real sector effects of rating-contingent Basel regulations.

Keywords: banking, basel regulations, real effects, credit rating, trade credit

JEL Classification: G21, G28, G32, F33, D82

Suggested Citation

Gopalakrishnan, Balagopal and Jacob, Joshy and Mohapatra, Sanket, The Direct and Indirect Effects of Rating-Contingent Basel Regulations on Financing of Firms: Global Evidence (July 30, 2018). Available at SSRN: https://ssrn.com/abstract=3222819 or http://dx.doi.org/10.2139/ssrn.3222819

Balagopal Gopalakrishnan (Contact Author)

Indian Institute of Management Kozhikode ( email )

Faculty Block 2/14
Kunnamangalam
Kozhikode
India

Joshy Jacob

Indian Institute of Management (IIM), Ahmedabad ( email )

Vastrapur
Ahmedabad, Gujarat 380 015
India

Sanket Mohapatra

Indian Institute of Management Ahmedabad ( email )

Wing 1-F, IIM Old Campus
Vastrapur
Ahmedabad, 380015
India

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