Peer Firms’ Credit Rating Changes and Corporate Financing

The European Journal of Finance, 2019

48 Pages Posted: 11 Nov 2019

See all articles by Chi-Hsiou Daniel Hung

Chi-Hsiou Daniel Hung

University of Glasgow - Adam Smith Business School

Shammyla Naeem

University of Glasgow

K.C. John Wei

Hong Kong Polytechnic University

Date Written: October 1, 2019

Abstract

We find that firms reduce net debt issuance (NDI, hereafter) when industry peers with the same credit rating were downgraded in the previous year, as opposed to an average NDI increase among all firms. This finding is consistent with the considerations of competition and contagion associated with relative strengths and weaknesses in credit quality. The peer effect on NDI reduction is ubiquitous across both speculative- and investment-grade firms, but is particularly strong for small size firms with speculative-grade ratings, and firms operating in concentrated industries, and in times when the economy is in expansion or outside financial crises. We also find that firms reduce leverage when their ratings are lower than the industry average, and that peer firms’ rating effects remain strong even when controlling for the lower-than-average effect.

Keywords: Corporate financing; Peer firms; Credit ratings; Upgrades; Downgrades

JEL Classification: G2, G32

Suggested Citation

Hung, Chi-Hsiou Daniel and Naeem, Shammyla and Wei, Kuo-Chiang (John), Peer Firms’ Credit Rating Changes and Corporate Financing (October 1, 2019). The European Journal of Finance, 2019. Available at SSRN: https://ssrn.com/abstract=3478536 or http://dx.doi.org/10.2139/ssrn.3478536

Chi-Hsiou Daniel Hung (Contact Author)

University of Glasgow - Adam Smith Business School ( email )

Gilbert Scott Building
University of Glasgow
Glasgow, Scotland G12 8QQ
United Kingdom

Shammyla Naeem

University of Glasgow ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
United Kingdom

Kuo-Chiang (John) Wei

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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