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

Journal

Journal of Finance

Subject

Finance

Publishing details

Journal of Finance 2014 October Vol 69:5 p 1961-2005

Authors / Editors

Baghai R;Servaes H;Tamayo A

Biographies

Henri Servaes

Publisher

Publication Year

2014

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.

Available on ECCH

No


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