Hostname: page-component-cd9895bd7-dzt6s Total loading time: 0 Render date: 2025-01-05T13:59:31.381Z Has data issue: false hasContentIssue false
  • English
  • Français

Credit Ratings and Corporate Information Production: Evidence from Sovereign Downgrades

Published online by Cambridge University Press:  03 September 2021

Daisy (Sicong) Wang  and
Wensi Xie Open the ORCID record for Wensi Xie [Opens in a new window]
Daisy (Sicong) Wang
Affiliation:
The Ohio State University Fisher College of [email protected]
Wensi Xie*
Affiliation:
Chinese University of Hong Kong CUHK Business School
*
[email protected] (corresponding author)
Get access Rights & Permissions [Opens in a new window]

Abstract

Exploiting exogenous variations in corporate ratings due to sovereign credit downgrades and sovereign ceiling policies, we assess how firms respond to a reduction in credit ratings. We find that firms bounded by the sovereign ceiling significantly increase information production in response to a sovereign downgrade. The effects are stronger for firms relying more heavily on external finance and operating in a more opaque environment. Enhanced information production, in turn, affects firms’ subsequent access to bond markets. These findings suggest that firms actively manage information environments to maintain access to public debt markets.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 4 , June 2022 , pp. 1591 - 1620
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank Manuel Adelino, Heitor Almeida, Ling Cen, Joseph Cheng, Sudipto Dasgupta, Andrew Ellul, Jarrad Harford (the editor), Xu Li, René Stulz, Michael Weisbach, Han Xia, and Wenrui Zhang for constructive comments and valuable suggestions. This article is an extended and revised version of Wang’s MPhil thesis (2018) at the Chinese University of Hong Kong.

References

Adelino, M.; Cunha, I.; and Ferreira, M. A.. “The Economic Effects of Public Financing: Evidence from Municipal Bond Ratings Recalibration.” Review of Financial Studies, 30 (2017), 3223–3268.CrossRefGoogle Scholar
Adelino, M., and Ferreira, M. A.. “Bank Ratings and Lending Supply: Evidence from Sovereign Downgrades.” Review of Financial Studies, 29 (2016), 1709–1746.CrossRefGoogle Scholar
Agarwal, S.; Chen, V. Y. S.; and Zhang, W.. “The Information Value of Credit Rating Action Reports: A Textual Analysis.” Management Science, 62 (2016), 2218–2240.CrossRefGoogle Scholar
Almeida, H.; Cunha, I.; Ferreira, M. A.; and Restrepo, F.. “The Real Effects of Credit Ratings: The Sovereign Ceiling Channel.” Journal of Finance, 72 (2017), 249–290.CrossRefGoogle Scholar
Angrist, J. D. “Estimation of Limited Dependent Variable Models with Dummy Endogenous Regressors: Simple Strategies for Empirical Practice.” Journal of Business and Economic Statistics, 19 (2001), 2–28.CrossRefGoogle Scholar
Balakrishnan, K.; Billings, M. B.; Kelly, B.; and Ljungqvist, A.. “Shaping Liquidity: On the Causal Effects of Voluntary Disclosure.” Journal of Finance, 69 (2014), 2237–2278.CrossRefGoogle Scholar
Basu, R.; Naughton, J. P.; and Wang, C.. “The Regulatory Role of Credit Ratings and Voluntary Disclosure.” Working Paper, George Washington University (2020).Google Scholar
Bonsall, S., and Miller, B.. “The Impact of Narrative Disclosure Readability on Bond Ratings and the Cost of Debt.” Review of Accounting Studies, 22 (2017), 608–643.CrossRefGoogle Scholar
Borensztein, E.; Cowan, K.; and Valenzuela, P.. “Sovereign Ceilings “Lite”? The Impact of Sovereign Ratings on Corporate Ratings.” Journal of Banking & Finance, 37 (2013), 4014–4024.CrossRefGoogle Scholar
Brockman, P.; Khurana, I. K.; and Martin, X.. “Voluntary Disclosures around Share Repurchases.” Journal of Financial Economics, 89 (2008), 175–191.CrossRefGoogle Scholar
Chen, T.; Harford, J.; and Lin, C.. “Do Analysts Matter for Governance? Evidence from Natural Experiments.” Journal of Financial Economics, 115 (2015), 383–410.CrossRefGoogle Scholar
Cornaggia, J.; Cornaggia, K. J.; and Israelsen, R. D.. “Credit Ratings and the Cost of Municipal Financing.” Review of Financial Studies, 31 (2017), 2038–2079.CrossRefGoogle Scholar
Easley, D., and O’Hara, M.. “Information and the Cost of Capital.” Journal of Finance, 59 (2004), 1553–1583.CrossRefGoogle Scholar
Ellul, A.; Jotikasthira, C.; and Lundblad, C. T.. “Regulatory Pressure and Fire Sales in the Corporate Bond Market.” Journal of Financial Economics, 101 (2011), 596–620.CrossRefGoogle Scholar
Ellul, A., and Panayides, M.. “Do Financial Analysts Restrain Insiders’ Informational Advantage?” Journal of Financial and Quantitative Analysis, 53 (2018), 203–241.CrossRefGoogle Scholar
Fulghieri, P.; Strobl, G.; and Xia, H.. “The Economics of Solicited and Unsolicited Credit Ratings.” Review of Financial Studies, 27 (2013), 484–518.CrossRefGoogle Scholar
Graham, J. R., and Harvey, C. R.. “The Theory and Practice of Corporate Finance: Evidence from the Field.” Journal of Financial Economics, 60 (2001), 187–243.CrossRefGoogle Scholar
Graham, J. R.; Li, S.; and Qiu, J.. “Corporate Misreporting and Bank Loan Contracting.” Journal of Financial Economics, 89 (2008), 44–61.CrossRefGoogle Scholar
Harford, J., and Uysal, V. B.. “Bond Market Access and Investment.” Journal of Financial Economics, 112 (2014), 147–163.CrossRefGoogle Scholar
Healy, P. M., and Palepu, K. G.. “Information Asymmetry, Corporate Disclosure, and the Capital Markets: A Review of the Empirical Disclosure Literature.” Journal of Accounting and Economics, 31 (2001), 405–440.CrossRefGoogle Scholar
Hirst, D. E.; Koonce, L.; and Venkataraman, S.. “Management Earnings Forecasts: A Review and Framework.” Accounting Horizons, 22 (2008), 315–338.CrossRefGoogle Scholar
Jorion, P.; Liu, Z.; and Shi, C.. “Informational Effects of Regulation FD: Evidence from Rating Agencies.” Journal of Financial Economics, 76 (2005), 309–330.CrossRefGoogle Scholar
Kaminsky, G., and Schmukler, S. L.. “Emerging Market Instability: Do Sovereign Ratings Affect Country Risk and Stock Returns?” World Bank Economic Review, 16 (2002), 171–195.CrossRefGoogle Scholar
Kedia, S.; Rajgopal, S.; and Zhou, X.. “Large Shareholders and Credit Ratings.” Journal of Financial Economics, 124 (2017), 632–653.CrossRefGoogle Scholar
Kisgen, D. J. “Credit Ratings and Capital Structure.” Journal of Finance, 61 (2006), 1035–1072.CrossRefGoogle Scholar
Kisgen, D. J., and Strahan, P. E.. “Do Regulations Based on Credit Ratings Affect a Firm’s Cost of Capital?” Review of Financial Studies, 23 (2010), 4324–4347.CrossRefGoogle Scholar
Kliger, D., and Sarig, O.. “The Information Value of Bond Ratings.” Journal of Finance, 55 (2000), 2879–2902.CrossRefGoogle Scholar
Lang, M. H., and Lundholm, R. J.. “Voluntary Disclosure and Equity Offerings: Reducing Information Asymmetry or Hyping the Stock?” Contemporary Accounting Research, 17 (2000), 623–662.CrossRefGoogle Scholar
Moody’s. “Revised Policy with Respect to Country Ceilings” (2005).Google Scholar
Rajan, R. G., and Zingales, L.. “Financial Dependence and Growth.” American Economic Review, 88 (1998), 559–586.Google Scholar
Standard & Poor’s. “Methodology and Assumptions: Request for Comment: Ratings Above the Sovereign—Corporate and Government Rating.” Rating Direct (2013).Google Scholar
Tang, T. T. “Information Asymmetry and Firms’ Credit Market Access: Evidence from Moody’s Credit Rating Format Refinement.” Journal of Financial Economics, 93 (2009), 325–351.CrossRefGoogle Scholar
Xia, H. “Can Investor-Paid Credit Rating Agencies Improve the Information Quality of Issuer-Paid Rating Agencies?” Journal of Financial Economics, 111 (2014), 450–468.CrossRefGoogle Scholar