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MANAGING FOR RATINGS: REAL EFFECTS OF A CORPORATE RATINGS CRITERIA CHANGE
Author(s) -
Alanis Emmanuel,
Payne Janet,
Picard Joerg
Publication year - 2020
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/jfir.12226
Subject(s) - debt , business , equity (law) , cash flow , monetary economics , natural experiment , credit rating , exploit , cash , investment (military) , finance , accounting , economics , mathematics , computer security , politics , political science , computer science , law , statistics
Abstract We exploit a criteria change by Standard & Poor's (S&P) to examine the real effects of a credit ratings change. Using a recalibration by S&P, unrelated to firms’ fundamentals, as a quasi‐natural experiment we analyze the impact of a ratings upgrade on the issuance activity, investment, cash holdings, and payout policy of companies. Our findings suggest upgraded firms subsequently issue more debt relative to equity, enjoy lower debt yields, and increase their investment rate and share repurchases. We find limited evidence that upgraded firms decrease their cash holdings. Our results support the view that credit ratings have a real effect on corporations.