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Strategic archetypes, credit ratings, and cost of debt

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  • Dang, Man
  • Puwanenthiren, Premkanth
  • Jones, Edward
  • Nguyen, Thieu Quang
  • Vo, Xuan Vinh
  • Nadarajah, Sivathaasan

Abstract

Despite the theoretical and empirical controversy about rating agencies' reputational issues, credit ratings have far-reaching implications for financing and investment decisions. However, the relationship between strategic behavior and credit ratings remains largely unexplored. Using a large sample of U.S. non-financial firms between 1981 and 2016, we examine how established archetypes of strategic behavior in business affect firms’ credit ratings. We document that firms with prospector type strategies experience significantly lower credit ratings than firms which are identified as defenders and analyzers. The negative effect on credit ratings is more pronounced for firms operating in weaker governance environments and during periods of high economic policy uncertainty. Further, we find that prospector type firms with weaker credit ratings have a higher cost of debt. Our results hold after accounting for endogeneity concerns and self-selection bias. Overall, our findings emphasize that more transparent and stringent governance can enhance ratings of prospector firms.

Suggested Citation

  • Dang, Man & Puwanenthiren, Premkanth & Jones, Edward & Nguyen, Thieu Quang & Vo, Xuan Vinh & Nadarajah, Sivathaasan, 2022. "Strategic archetypes, credit ratings, and cost of debt," Economic Modelling, Elsevier, vol. 114(C).
    • Handle: RePEc:eee:ecmode:v:114:y:2022:i:c:s0264999322001638
    DOI: 10.1016/j.econmod.2022.105917
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    More about this item

    Keywords

    Strategic archetypes; Credit ratings; Cost of debt; Information environment; Corporate governance; Policy uncertainty;
    All these keywords.

    JEL classification:

    • 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
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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