The devil is in the details: Does information in credit rating announcements affect dividend policy?

While recent studies have explored how firms react to credit rating events, the specific impact of news disclosed in credit rating change announcements on dividend policy remains largely unexplored. We analyze a sample of dividend paying firms that consistently paid dividends from 1995 to 2019 to examine whether, and to what extent, firms adjust dividend policy in credit rating shocks. Focusing on the type of information conveyed to the capital markets, we identify three types of downgrades, namely, “bad”, “good”, and “systemic” and upgrades associated with strong financial performance. We provide evidence that firms smooth dividends more under a “good” downgrade and less under a “bad” downgrade, a “systemic” downgrade and an upgrade. In favor of this finding, we show that dividend forecast errors are positively associated with “bad” downgrades, “systemic” downgrades and upgrades, but are not associated with “good” downgrades.