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Credit ratings and firm innovation: Evidence from sovereign downgrades

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  • Wang, Rui
  • Yang, Shijie

Abstract

This study investigates the relationship between credit ratings and firm innovation activities using a cross-country sample over the 1995–2020 period. Exploiting the setting of rating agencies’ sovereign ceiling policies, our main analysis shows that a one-notch reduction in corporate credit ratings engendered by sovereign downgrades, on average, leads to a 5.90% reduction in research and development (R&D) spending. We identify the substitution of external acquisitions for internal expenditures and the increase in creditor control as the underlying mechanisms of the causal relation. Moreover, the negative impact of credit rating downgrades on R&D investment results in deterioration in patent output and firm performance. The cross-sectional analysis shows that the observed effects on innovation and firm performance are concentrated in firms with higher external finance dependence or more growth options.

Suggested Citation

  • Wang, Rui & Yang, Shijie, 2023. "Credit ratings and firm innovation: Evidence from sovereign downgrades," Journal of Banking & Finance, Elsevier, vol. 148(C).
    • Handle: RePEc:eee:jbfina:v:148:y:2023:i:c:s0378426622002990
    DOI: 10.1016/j.jbankfin.2022.106719
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    More about this item

    Keywords

    Credit ratings; Corporate innovation; Sovereign rating downgrade; Creditor control; Mergers and acquisitions;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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