A Tale of Two Tails: Cross Credit Ratings and Cash Holdings

33 Pages Posted: 17 Dec 2018

See all articles by Panagiotis Asimakopoulos

Panagiotis Asimakopoulos

Loughborough University - School of Business and Economics; University of Piraeus

Stylianos Asimakopoulos

University of Bath

Date Written: November 27, 2018

Abstract

This paper examines the role of cross credit rating changes on corporate cash holdings policies, focusing on the "big three" credit rating agencies (Standard and Poor's, Fitch and Moody's). Using a hand collected sample of credit ratings for firms listed at the S&P500 we initially verify the asymmetric impact of Standard and Poor's changes on cash holdings and we extend our findings to Fitch and Moody's separately. However, we show that the information content of the various credit rating agencies is crucial and affects managers' risk aversion behavior and precautionary motives. Therefore, a cross credit rating downgrade by agencies that provide different information to the market (Moody's with any, or both, of the other two agencies) lead to a consistent and significant increase in cash holdings. These results remain valid for firms with investment grade status and high level of financial pressure, or if we use excess cash holdings.

Keywords: cash holdings, credit rating agencies, cross credit rating changes, financial pressure

JEL Classification: C23, C26, G30, G32

Suggested Citation

Asimakopoulos, Panagiotis and Asimakopoulos, Stylianos, A Tale of Two Tails: Cross Credit Ratings and Cash Holdings (November 27, 2018). Available at SSRN: https://ssrn.com/abstract=3291498 or http://dx.doi.org/10.2139/ssrn.3291498

Panagiotis Asimakopoulos

Loughborough University - School of Business and Economics ( email )

Epinal Way
Leics LE11 3TU
Leicestershire
United Kingdom

University of Piraeus ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece

Stylianos Asimakopoulos (Contact Author)

University of Bath ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

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