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

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  • 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.

Suggested Citation

  • Baghai, Ramin & Servaes, Henri & Tamayo, Ane, 2011. "Have Rating Agencies Become More Conservative? Implications for Capital Structure and Debt Pricing," CEPR Discussion Papers 8446, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8446
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    References listed on IDEAS

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    Cited by:

    1. Mascia Bedendo & Linus Siming, 2018. "The mitigating effect of bank financing on shareholder value and firm policies following rating downgrades," Post-Print hal-01636854, HAL.
    2. Bradley, Daniel & Pantzalis, Christos & Yuan, Xiaojing, 2016. "Policy risk, corporate political strategies, and the cost of debt," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 254-275.
    3. Aktas, Nihat & Karampatsas, Nikolaos & Petmezas, Dimitris & Servaes, Henri, 2015. "Credit Ratings and Acquisitions," CEPR Discussion Papers 10719, C.E.P.R. Discussion Papers.
    4. Rablen, Matthew D., 2013. "Divergence in credit ratings," Finance Research Letters, Elsevier, vol. 10(1), pages 12-16.
    5. G. Marandola & R. Mossucca, 2016. "When did the stock market start to react less to downgrades by Moody’s, S&P and Fitch?," Working Papers wp1066, Dipartimento Scienze Economiche, Universita' di Bologna.
    6. Boumparis, Periklis & Milas, Costas & Panagiotidis, Theodore, 2015. "Has the crisis affected the behavior of the rating agencies? Panel evidence from the Eurozone," Economics Letters, Elsevier, vol. 136(C), pages 118-124.
    7. 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.
    8. Lawrence J. White, 2013. "Credit Rating Agencies: An Overview," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 93-122, November.
    9. 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.
    10. repec:eee:ecofin:v:44:y:2018:i:c:p:289-313 is not listed on IDEAS
    11. repec:eee:finsta:v:34:y:2018:i:c:p:44-60 is not listed on IDEAS
    12. Hirth, Stefan, 2014. "Credit rating dynamics and competition," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 100-112.
    13. Dimitrov, Valentin & Palia, Darius & Tang, Leo, 2015. "Impact of the Dodd-Frank act on credit ratings," Journal of Financial Economics, Elsevier, vol. 115(3), pages 505-520.
    14. repec:oup:revfin:v:21:y:2017:i:2:p:465-509. is not listed on IDEAS
    15. Cornaggia, Jess & Cornaggia, Kimberly J. & Xia, Han, 2016. "Revolving doors on Wall Street," Journal of Financial Economics, Elsevier, vol. 120(2), pages 400-419.
    16. Degryse, Hans & Smedts, Kristien & Van Hulle, Cynthia, 2017. "Risk-sharing benefits and the capital structure of insurance companies," CEPR Discussion Papers 11838, C.E.P.R. Discussion Papers.
    17. Neta Sher & Koresh Galil, 2015. "Predicting default more accurately: to proxy or not to proxy for default?," Working Papers 1505, Ben-Gurion University of the Negev, Department of Economics.
    18. repec:bla:abacus:v:53:y:2017:i:1:p:59-93 is not listed on IDEAS
    19. Jean Paul Rabanal & Olga A. Rabanal, 2015. "Does competition affect truth-telling? An experiment with rating agencies," Working Papers 2015-48, Peruvian Economic Association.
    20. Borisova, Ginka & Fotak, Veljko & Holland, Kateryna & Megginson, William L., 2015. "Government ownership and the cost of debt: Evidence from government investments in publicly traded firms," Journal of Financial Economics, Elsevier, vol. 118(1), pages 168-191.
    21. repec:eee:corfin:v:48:y:2018:i:c:p:94-108 is not listed on IDEAS
    22. Balios, Dimitris & Thomadakis, Stavros & Tsipouri, Lena, 2016. "Credit rating model development: An ordered analysis based on accounting data," Research in International Business and Finance, Elsevier, vol. 38(C), pages 122-136.

    More about this item

    Keywords

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

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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