Have Rating Agencies Become More Conservative? Implications for Capital Structure and Debt Pricing

Have Rating Agencies Become More Conservative? Implications for Capital Structure and Debt Pricing

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. F...

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Bibliographic Details
Published in:The Journal of finance (New York) 2014-10, Vol.69 (5), p.1961-2005
Main Authors: BAGHAI, RAMIN P., SERVAES, HENRI, TAMAYO, ANE
Format: Article
Language:eng
Subjects:
Bond rating
Capital market
Capital markets
Capital structure
Cash
Conservatism
Credit rating
Credit ratings
Debt
Financial investments
Financial leverage
Leverage
Modeling
Pricing
Rating services
Regression analysis
Spread
Studies
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Summary: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.
ISSN:0022-1082
1540-6261
1540-6261