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

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

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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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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  1. 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.
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