Working Paper: NBER ID: w14890
Authors: Darren J. Kisgen; Philip E. Strahan
Abstract: In February 2003, the SEC officially certified a fourth credit rating agency, Dominion Bond Rating Service ("DBRS"), for use in bond investment regulations. After DBRS certification, bond yields change in the direction implied by the firm's DBRS rating relative to its ratings from other certified rating agencies. A one notch better DBRS rating corresponds to a 39 basis point reduction in a firm's debt cost of capital. The impact on yields is driven by cases where the DBRS rating is better than other ratings and is larger among bonds rated near the investment-grade cutoff. These findings indicate that ratings-based regulations on bond investment affect a firm's cost of debt capital.
Keywords: credit ratings; cost of capital; regulations; bond yields
JEL Codes: G18; G2; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| SEC's certification of DBRS as an NRSRO (G24) | increase in credibility of DBRS ratings (G24) |
| increase in credibility of DBRS ratings (G24) | reduction in cost of capital for firms rated better by DBRS (G32) |
| SEC's certification of DBRS as an NRSRO (G24) | change in bond yields (E43) |
| change in bond yields (E43) | reduction in cost of capital for firms rated better by DBRS (G32) |
| ratings provided by DBRS (G24) | change in bond yields (E43) |
| holding ratings constant as of January 2003 (G12) | rules out information-based explanations for yield changes (D89) |
| falsification tests using alternate dates (C52) | reinforcement of causal inference (C20) |