Anatomy of a ratings change
AbstractI document the frequency with which credit rating changes result from changes in the firm's operating environment versus changes in capital structure controlled by management. I find that management action plays a significant role in credit rating changes. Twenty-eight percent of downgrades and 44% of upgrades have a substantial management influence. The frequency of management impact on credit ratings shows the limitations of credit risk modeling using structural models that assume constant capital structure. Even the cases in which firms are downgraded across the investment/speculative grade threshold can be driven by management actions rather than operating or economic conditions. Twenty-two percent of the observations of firms newly downgraded to speculative grade are entirely attributable to management action. The frequency of management-driven changes exhibits yearly and industry variation.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Elsevier in its journal The Quarterly Review of Economics and Finance.
Volume (Year): 51 (2011)
Issue (Month): 1 (February)
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/620167
Credit ratings Financial policy;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hendrik Bessembinder & Kathleen M. Kahle & William F. Maxwell & Danielle Xu, 2009. "Measuring Abnormal Bond Performance," Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 4219-4258, October.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Goh, Jeremy C & Ederington, Louis H, 1993. " Is a Bond Rating Downgrade Bad News, Good News, or No News for Stockholders?," Journal of Finance, American Finance Association, vol. 48(5), pages 2001-08, December.
- Darren J. Kisgen, 2007. "The Influence of Credit Ratings on Corporate Capital Structure Decisions," Journal of Applied Corporate Finance, Morgan Stanley, vol. 19(3), pages 65-73.
- Sanjeev Bhojraj & Partha Sengupta, 2003. "Effect of Corporate Governance on Bond Ratings and Yields: The Role of Institutional Investors and Outside Directors," The Journal of Business, University of Chicago Press, vol. 76(3), pages 455-476, July.
- Acharya, Viral V & Carpenter, Jennifer, 2002.
"Corporate Bond Valuation and Hedging with Stochastic Interest Rates and Endogenous Bankruptcy,"
CEPR Discussion Papers
3328, C.E.P.R. Discussion Papers.
- Viral V. Acharya & Jennifer N. Carpenter, 2002. "Corporate Bond Valuation and Hedging with Stochastic Interest Rates and Endogenous Bankruptcy," Review of Financial Studies, Society for Financial Studies, vol. 15(5), pages 1355-1383.
- Hand, John R M & Holthausen, Robert W & Leftwich, Richard W, 1992. " The Effect of Bond Rating Agency Announcements on Bond and Stock Prices," Journal of Finance, American Finance Association, vol. 47(2), pages 733-52, June.
- Klock, Mark S. & Mansi, Sattar A. & Maxwell, William F., 2005. "Does Corporate Governance Matter to Bondholders?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(04), pages 693-719, December.
- Darren J. Kisgen, 2006. "Credit Ratings and Capital Structure," Journal of Finance, American Finance Association, vol. 61(3), pages 1035-1072, 06.
- Merton, Robert C, 1974.
"On the Pricing of Corporate Debt: The Risk Structure of Interest Rates,"
Journal of Finance,
American Finance Association, vol. 29(2), pages 449-70, May.
- Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Pierre Collin-Dufresne, 2001. "Do Credit Spreads Reflect Stationary Leverage Ratios?," Journal of Finance, American Finance Association, vol. 56(5), pages 1929-1957, October.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If references are entirely missing, you can add them using this form.