Credit Ratings and Capital Structure: New Evidence from Overconfident CFOs

49 Pages Posted: 29 Mar 2021

See all articles by Shee Yee Khoo

Shee Yee Khoo

PhD candidate

Huong Vu

Lecturer in Finance

Patrycja Klusak

Norwich Business School; Bennett Institute for Public Policy, University of Cambridge

Date Written: March 26, 2021

Abstract

In this paper, we examine the impact of credit rating changes on the financing decisions of overconfident CFOs. We find that CFO overconfidence significantly increases the sensitivity of net debt issuances to the rating changes, particularly when firms have no access to low-risk debt. Specifically, we establish that speculative-grade firms with overconfident CFOs reduce net debt issuance following rating changes (i.e. upgrades and downgrades). Our results hold after controlling for CEO bias. Furthermore, we document that CEO overconfidence has explanatory power on firm financing policies as it generates the potential multiplier effect on debt conservatism, as well as on investment return. Findings of our paper are robust to model specifications and to the endogeneity bias.

Keywords: Credit Ratings, Corporate Finance, Capital Structure, Behavioural Finance, CEO Overconfidence, CFO Overconfidence

JEL Classification: G24, G32, G40

Suggested Citation

Khoo, Shee Yee and Vu, Huong and Klusak, Patrycja and Klusak, Patrycja, Credit Ratings and Capital Structure: New Evidence from Overconfident CFOs (March 26, 2021). Available at SSRN: https://ssrn.com/abstract=3813478 or http://dx.doi.org/10.2139/ssrn.3813478

Shee Yee Khoo

PhD candidate

Dunbar Street
Aberdeen, Scotland AB24 3QY
United Kingdom

Huong Vu

Lecturer in Finance

Dunbar Street
Aberdeen, Scotland AB24 3QY
United Kingdom

Patrycja Klusak (Contact Author)

Norwich Business School ( email )

Norwich Research Park
Norwich, Norfolk NR4 7TJ
United Kingdom

HOME PAGE: http://https://www.uea.ac.uk/norwich-business-school/people/profile/p-klusak

Bennett Institute for Public Policy, University of Cambridge ( email )

First Floor
17 Mill Lane
Cambridge, CB2 1RX
Great Britain

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