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Have Rating Agencies Become More Conservative? Implications for Capital Structure and Debt Pricing

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Author Info

  • Baghai, Ramin
  • Servaes, Henri
  • Tamayo, Ane

Abstract

We document that rating agencies have become more conservative in assigning ratings to corporate bonds over the period 1985 to 2009. Holding firm characteristics constant, average ratings have dropped by 3 notches (e.g., from A+ to BBB+) over time. This increased stringency has affected both capital structure and debt spreads. Firms that suffer most from this conservatism issue less debt and have lower leverage. However, their debt spreads are lower compared to the spreads of firms that have not suffered from this conservatism, which implies that the market partly undoes the impact of conservatism on debt prices. This evidence suggests that firms and capital markets do not perceive that the increase in conservatism is fully warranted.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8446.

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Date of creation: Jun 2011
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Handle: RePEc:cpr:ceprdp:8446

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Related research

Keywords: Capital structure; Credit ratings; Debt issues; Debt spreads;

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References

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  1. Patrick Bolton & Xavier Freixas & Joel Shapiro, 2009. "The credit ratings game," Economics Working Papers 1149, Department of Economics and Business, Universitat Pompeu Fabra.
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  4. Marco Pagano & Paolo Volpin, 2010. "Credit ratings failures and policy options," Economic Policy, CEPR;CES;MSH, vol. 25, pages 401-431, 04.
  5. Bates, Thomas W. & Kahle, Kathleen M. & Stulz, Rene M., 2007. "Why Do U.S. Firms Hold So Much More Cash Than They Used To?," Working Paper Series 2006-17, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  6. Daniel M. Covitz & Paul Harrison, 2003. "Testing conflicts of interest at bond rating agencies with market anticipation: evidence that reputation incentives dominate," Finance and Economics Discussion Series 2003-68, Board of Governors of the Federal Reserve System (U.S.).
  7. Viral V. Acharya & Sergei A. Davydenko & Ilya A. Strebulaev, 2011. "Cash Holdings and Credit Risk," NBER Working Papers 16995, National Bureau of Economic Research, Inc.
  8. Becker, Bo & Milbourn, Todd, 2011. "How did increased competition affect credit ratings?," Journal of Financial Economics, Elsevier, vol. 101(3), pages 493-514, September.
  9. Marshall E. Blume & Felix Lim & A. Craig MacKinlay, . "The Declining Credit Quality of US Corporate Debt: Myth or Reality?," Rodney L. White Center for Financial Research Working Papers 03-98, Wharton School Rodney L. White Center for Financial Research.
  10. Marshall E. Blume & Felix Lim & A. Craig MacKinlay, . "The Declining Credit Quality of US Corporate Debt: Myth or Reality?," Rodney L. White Center for Financial Research Working Papers 3-98, Wharton School Rodney L. White Center for Financial Research.
  11. John R. Graham, 2000. "How Big Are the Tax Benefits of Debt?," Journal of Finance, American Finance Association, vol. 55(5), pages 1901-1941, October.
  12. Marshall E. Blume & Felix Lim & A. Craig Mackinlay, 1998. "The Declining Credit Quality of U.S. Corporate Debt: Myth or Reality?," Journal of Finance, American Finance Association, vol. 53(4), pages 1389-1413, 08.
  13. Jewell, Jeff & Livingston, Miles, 1998. "Split Ratings, Bond Yields, and Underwriter Spreads," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 21(2), pages 185-204, Summer.
  14. repec:fth:pennfi:67 is not listed on IDEAS
  15. Darren J. Kisgen, 2006. "Credit Ratings and Capital Structure," Journal of Finance, American Finance Association, vol. 61(3), pages 1035-1072, 06.
  16. Ilya A. Strebulaev & Baozhong Yang, 2012. "The Mystery of Zero-Leverage Firms," NBER Working Papers 17946, National Bureau of Economic Research, Inc.
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Cited by:
  1. Rablen, Matthew D., 2013. "Divergence in credit ratings," Finance Research Letters, Elsevier, vol. 10(1), pages 12-16.
  2. Erik Berwart & Massimo Guidolin & Andreas Milidonis, 2013. "An Empirical Analysis of Changes in the Relative Timeliness of Issuer-Paid vs. Investor-Paid Ratings," Working Papers 482, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.

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