Advanced Search
MyIDEAS: Login to save this article or follow this journal

Do Regulations Based on Credit Ratings Affect a Firm's Cost of Capital?

Contents:

Author Info

  • Darren J. Kisgen
  • Philip E. Strahan
Registered author(s):

    Abstract

    In February 2003, the U.S. Securities and Exchange Commission officially certified a fourth credit rating agency, Dominion Bond Rating Service (DBRS), for use in bond investment regulations. After DBRS certification, bond yields change in the direction implied by the firm's DBRS rating relative to its ratings from other certified rating agencies. A one-notch-higher DBRS rating corresponds to a 39-basis-point reduction in a firm's debt cost of capital. The impact on yields is driven by cases where the DBRS rating is better than other ratings and is larger among bonds rated near the investment-grade cutoff. These findings indicate that ratings-based regulations on bond investment affect a firm's cost of debt capital. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

    Download Info

    If 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.
    File URL: http://hdl.handle.net/10.1093/rfs/hhq077
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by Society for Financial Studies in its journal Review of Financial Studies.

    Volume (Year): 23 (2010)
    Issue (Month): 12 (December)
    Pages: 4324-4347

    as in new window
    Handle: RePEc:oup:rfinst:v:23:y:2010:i:12:p:4324-4347

    Contact details of provider:
    Postal: Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.
    Fax: 919-677-1714
    Email:
    Web page: http://www.rfs.oupjournals.org/
    More information through EDIRC

    Order Information:
    Web: http://www4.oup.co.uk/revfin/subinfo/

    Related research

    Keywords:

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Jeon, Doh-Shin & Lovo, Stefano, 2013. "Credit Rating Industry: a Helicopter Tour of Stylized Facts and Recent Theories," IDEI Working Papers 762, Institut d'Économie Industrielle (IDEI), Toulouse.
    2. Karampatsas, Nikolaos & Petmezas, Dimitris & Travlos, Nickolaos G., 2014. "Credit ratings and the choice of payment method in mergers and acquisitions," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 474-493.
    3. Mählmann, Thomas, 2012. "Did investors outsource their risk analysis to rating agencies? Evidence from ABS-CDOs," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1478-1491.
    4. Jeon, Doh-Shin & Lovo, Stefano, 2013. "Credit rating industry: A helicopter tour of stylized facts and recent theories," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 643-651.
    5. Opp, Christian C. & Opp, Marcus M. & Harris, Milton, 2013. "Rating agencies in the face of regulation," Journal of Financial Economics, Elsevier, vol. 108(1), pages 46-61.
    6. Qiu, Jiaping & Yu, Fan, 2012. "Endogenous liquidity in credit derivatives," Journal of Financial Economics, Elsevier, vol. 103(3), pages 611-631.
    7. Lawrence J. White, 2013. "Credit Rating Agencies: An Overview," Working Papers 13-10, New York University, Leonard N. Stern School of Business, Department of Economics.
    8. Milidonis, Andreas, 2013. "Compensation incentives of credit rating agencies and predictability of changes in bond ratings and financial strength ratings," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3716-3732.
    9. Donato Masciandaro, 2013. "Sovereign debt: financial market over-reliance on credit rating agencies," BIS Papers chapters, in: Bank for International Settlements (ed.), Sovereign risk: a world without risk-free assets?, volume 72, pages 50-62 Bank for International Settlements.
    10. Jeon, Doh-Shin & Lovo, Stefano, 2013. "Credit Rating Industry: a Helicopter Tour of Stylized Facts and Recent Theories," TSE Working Papers 13-376, Toulouse School of Economics (TSE).
    11. Jiang, John (Xuefeng) & Harris Stanford, Mary & Xie, Yuan, 2012. "Does it matter who pays for bond ratings? Historical evidence," Journal of Financial Economics, Elsevier, vol. 105(3), pages 607-621.
    12. Alessandro Prati & Martin Schindler & Patricio Valenzuela, 2009. "Who Benefits From Capital Account Liberalization? Evidence From Firm-Level Credit Ratings Data," IMF Working Papers 09/210, International Monetary Fund.
    13. Manso, Gustavo, 2013. "Feedback effects of credit ratings," Journal of Financial Economics, Elsevier, vol. 109(2), pages 535-548.
    14. Borensztein, Eduardo & Cowan, Kevin & Valenzuela, Patricio, 2013. "Sovereign ceilings “lite”? The impact of sovereign ratings on corporate ratings," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4014-4024.
    15. Xia, Han, 2014. "Can investor-paid credit rating agencies improve the information quality of issuer-paid rating agencies?," Journal of Financial Economics, Elsevier, vol. 111(2), pages 450-468.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:oup:rfinst:v:23:y:2010:i:12:p:4324-4347. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press) or (Christopher F. Baum).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.