Have Rating Agencies Become More Conservative? Implications for Capital Structure and Debt Pricing
47 Pages Posted: 25 Jun 2011
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Have Rating Agencies Become More Conservative? Implications for Capital Structure and Debt Pricing
Date Written: June 2011
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 Classification: G32
Suggested Citation: Suggested Citation
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