Impact of credit rating on the strategies of MNCs

This chapter contributes to a better understanding of stock market reactions to downgrades and of the type of strategic restructuring conducted by MNCs. Reactions of stock prices for the downgraded MNCs in our study were not significantly different from zero on average. Indeed, the announcement may have already been expected by stock analysts and/or the impact on their debt cost and cash flows may have been low if the initial rating was high. However, this average result revealed different situations because only half of the downgrades destroyed stockholder value. The stock price reaction was more than −5 per cent over the period of (−1, +1) days around a downgrade. The reasons for the downgrade (acquisition or operating performance decline) seemed to have limited impact on stock market reactions. In addition, we noticed many operational and financial changes in the six months following a downgrade. Divestiture was the main reaction for enhancing financial flexibility. The measures were all the more significant when the initial rating was low, in particular for non-core asset sales. Their frequency was higher when the initial rating was BBB (corresponding to a downgrade to the BBB− lowest rating in the investment grade). Finally, the reasons for downgrades had an effect on the type of restructuring: a downgrade in a difficult context involved a larger number of financial measures than a downgrade after an acquisition.