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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)
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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

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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.

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