The Real Effects of Ratings Actions: Evidence from Corporate Asset Sales

Abstract

We investigate whether and through which channel credit rating downgrades induce corporate restructurings. For a comprehensive sample, we find a strong and robust link between rating actions and subsequent restructuring activity and hypothesize these could be disciplinary (ex-post efficient) or meant to counter tighter financial constraints (ex-post inefficient). Based on the self-reported restructuring types and the choice of assets sold, we find evidence for rating-induced asset sales aimed to relax financial constraints. We find no evidence of firms addressing inefficiencies in their assets allocations as a result of ratings actions.

Keywords: Credit ratings, asset sales, asset allocation, financial constraints

JEL Classification: G34