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The Real Effects of Credit Ratings: The Sovereign Ceiling Channel
Author(s) -
ALMEIDA HEITOR,
CUNHA IGOR,
FERREIRA MIGUEL A.,
RESTREPO FELIPE
Publication year - 2017
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12434
Subject(s) - downgrade , credit rating , sovereign credit , bond credit rating , business , sovereignty , monetary economics , financial system , credit risk , economics , finance , credit default swap , credit reference , politics , computer science , political science , law , computer security
We show that sovereign debt impairments can have a significant effect on financial markets and real economies through a credit ratings channel. Specifically, we find that firms reduce their investment and reliance on credit markets due to a rising cost of debt capital following a sovereign rating downgrade. We identify these effects by exploiting exogenous variation in corporate ratings due to rating agencies' sovereign ceiling policies, which require that firms' ratings remain at or below the sovereign rating of their country of domicile.