Have rating agencies become more conservative? Implications for capital structure and debt pricing

Servaes, H and Baghai, R and Tamayo, A (2014) Have rating agencies become more conservative? Implications for capital structure and debt pricing. Journal of Finance, 69 (5). pp. 1961-2005. ISSN 0022-1082

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Abstract

Rating agencies have become more conservative in assigning corporate credit ratings over the period 1985 to 2009; holding firm characteristics constant, average ratings have dropped by three notches. This change does not appear to be fully warranted because defaults have declined over this period. Firms affected more by conservatism issue less debt, have lower leverage, hold more cash, are less likely to obtain a debt rating, and experience lower growth. Their debt spreads are lower than those of unaffected firms with the same rating, 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 the increase in conservatism to be fully warranted.

Item Type: Article
Additional Information: © 2014 the American Finance Association
Subject Areas: Finance
DOI: 10.1111/jofi.12153
Date Deposited: 02 Mar 2016 18:51
Last Modified: 22 Mar 2016 19:24
URI: http://lbsresearch.london.edu/id/eprint/92

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