Working Paper: CEPR ID: DP8446
Authors: ramin baghai; henri servaes; ane tamayo
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.
Keywords: capital structure; credit ratings; debt issues; debt spreads
JEL Codes: G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased conservatism of rating agencies (G24) | Capital structure decisions (G32) |
| Increased conservatism of rating agencies (G24) | Debt issuance (H63) |
| Increased conservatism of rating agencies (G24) | Leverage (G32) |
| Conservatism (E65) | Debt spreads (H63) |
| Actual ratings below predicted ratings by one notch (E17) | Debt issuance (H63) |
| Difference between actual and predicted ratings (C52) | Debt spreads (H63) |