Do Credit Ratings Matter? Evidence from S&P's 2013 Methodology Revision

57 Pages Posted: 28 Sep 2018 Last revised: 31 Jul 2019

See all articles by Tim Liu

Tim Liu

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Anil Shivdasani

University of North Carolina Kenan-Flagler Business School

Date Written: March 2019

Abstract

Exploiting exogenous variation introduced by a significant change in S&P’s methodology, we show that credit ratings have a first-order causal impact on capital structure and investment decisions. Quantifying debt capacity within a firm’s credit rating (Ratings Capacity) using precise metrics, we show that capital structure is highly sensitive to changes in Ratings Capacity. Credit ratings explain more variation in capital structure changes than other firm-specific determinants. Firms with low adjustment costs and attractive investment opportunities are more responsive to Ratings Capacity. Increased Ratings Capacity causes significant expansion in investment and reductions in share repurchases, suggesting wide impacts on financial policy.

Keywords: Credit Ratings, Capital Structure, Financial Policy

JEL Classification: G00, G24, G30, G32

Suggested Citation

Liu, Tim and Shivdasani, Anil, Do Credit Ratings Matter? Evidence from S&P's 2013 Methodology Revision (March 2019). Available at SSRN: https://ssrn.com/abstract=3245633 or http://dx.doi.org/10.2139/ssrn.3245633

Tim Liu

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

Anil Shivdasani (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-3182 (Phone)
919-962-2068 (Fax)

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