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How creditor rights affect the issuance of public debt: The role of credit ratings

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  • Gu, Xian
  • Kadiyala, Padma
  • Mahaney-Walter, Xin Wu

Abstract

We propose that credit ratings act as an information channel which, combined with more power being given to creditors by countries strengthening creditor rights, leads to an increase in the supply of public debt. From a firm-level dataset covering 51 developed and developing countries for 1989 through 2013, we find that in countries with stronger creditor rights, firms tend to have higher credit ratings. We confirm that in these countries, firms with higher credit ratings exhibit a greater issuance of public debt than that of equity. As further evidence that credit ratings reduce agency costs of debt, we find that improvements in creditor rights and resulting higher credit ratings increase capital expenditures among firms experiencing severe bondholder-shareholder conflicts.

Suggested Citation

  • Gu, Xian & Kadiyala, Padma & Mahaney-Walter, Xin Wu, 2018. "How creditor rights affect the issuance of public debt: The role of credit ratings," Journal of Financial Stability, Elsevier, vol. 39(C), pages 133-143.
    • Handle: RePEc:eee:finsta:v:39:y:2018:i:c:p:133-143
    DOI: 10.1016/j.jfs.2018.11.001
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    Cited by:

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    2. Wojewodzki, Michal & Boateng, Agyenim & Brahma, Sanjukta, 2020. "Credit rating, banks' capital structure and speed of adjustment: A cross-country analysis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 69(C).
    3. Mazumder, Sharif & Rao, Ramesh, 2023. "Social trust and the choice between bank debt and public debt: Evidence from international data," Journal of Multinational Financial Management, Elsevier, vol. 67(C).
    4. Vivian M. van Breemen & Frank J. Fabozzi & Mike Nawas & Dennis Vink, 2024. "Creditor protection and credit ratings in the US RMBS market," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 33(3), pages 267-292, August.
    5. Mushtaq Hussain Khan & Mohammad Bitar & Amine Tarazi & Arshad Hassan & Ahmad Fraz, 2021. "Corruption and bank risk-taking: The deterring role of Shari'ah supervision," Working Papers hal-03366460, HAL.
    6. Florian Kiesel, 2021. "It's the tone, stupid! Soft information in credit rating reports and financial markets," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 44(3), pages 553-585, September.
    7. Kladakis, George & Skouralis, Alexandros, 2024. "Credit rating downgrades and systemic risk," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 90(C).
    8. Qi, Qianru & Wang, Jing, 2021. "Debt structure instability using machine learning," Journal of Financial Stability, Elsevier, vol. 57(C).
    9. Driss, Hamdi & Drobetz, Wolfgang & El Ghoul, Sadok & Guedhami, Omrane, 2021. "Institutional investment horizons, corporate governance, and credit ratings: International evidence," Journal of Corporate Finance, Elsevier, vol. 67(C).

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    More about this item

    Keywords

    Creditor rights; Credit rating; Bond; Investment;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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