Do Credit Ratings Matter? Evidence from S&P's 2013 Methodology Revision
67 Pages Posted: 28 Sep 2018 Last revised: 30 Nov 2022
Date Written: November 21, 2022
Exploiting exogenous variation introduced by a significant change in S&P’s methodology, we show that the desire for credit rating preservation causes conservatism in capital structure and investment decisions. Using a novel measure to quantify debt capacity within a firm’s credit rating, we show that firms increase leverage in response to an exogenous relaxation of credit rating constraints. Ratings preservation constrains firms from pursuing optimal leverage and explains more variation in capital structure changes than other firm-specific determinants. The ratings channel is distinct from financial constraints used in the literature and has wide influence on financial policy.
Keywords: Credit Ratings, Capital Structure, Financial Policy
JEL Classification: G00, G24, G30, G32
Suggested Citation: Suggested Citation