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Corporate financing and anticipated credit rating changes

Author

Listed:
  • Chi-Hsiou D. Hung

    (University of Glasgow)

  • Anurag Banerjee

    (Durham University)

  • Qingrui Meng

    (Durham University)

Abstract

Firm circumstances change but rating agencies may not make timely revisions to their ratings, thereby increasing information asymmetry between firms and the market. We examine whether firms time the securities market before a credit rating agency publicly reveals its decision to change a firm’s credit rating. Using quarterly data, we show that firms adjust their financing structures before credit rating downgrades are publicly revealed. Specifically, firms on average increase their debt financing by 1.29 % before the disclosure of a rating downgrade, and this increase is due to the issuance of debt rather than the repurchase of equity. In contrast, firms do not take significant financing actions before credit rating upgrades.

Suggested Citation

  • Chi-Hsiou D. Hung & Anurag Banerjee & Qingrui Meng, 2017. "Corporate financing and anticipated credit rating changes," Review of Quantitative Finance and Accounting, Springer, vol. 48(4), pages 893-915, May.
    • Handle: RePEc:kap:rqfnac:v:48:y:2017:i:4:d:10.1007_s11156-016-0571-3
    DOI: 10.1007/s11156-016-0571-3
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    References listed on IDEAS

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    Cited by:

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    2. Florian Kiesel & Sascha Kolaric, 2018. "Measuring the effect of watch-preceded and direct rating changes: a note on credit markets," Review of Quantitative Finance and Accounting, Springer, vol. 50(2), pages 653-672, February.
    3. Kiesel, F. & Kolaric, S., 2018. "Measuring the effect of watch-preceded and direct rating changes: a note on credit markets," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 87386, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    4. Emmanuel Alanis & Janet Payne & Joerg Picard, 2020. "Managing For Ratings: Real Effects Of A Corporate Ratings Criteria Change," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 43(4), pages 821-845, December.
    5. Winnie P. H. Poon & Jianfu Shen, 2020. "The roles of rating outlooks: the predictor of creditworthiness and the monitor of recovery efforts," Review of Quantitative Finance and Accounting, Springer, vol. 55(3), pages 1063-1091, October.
    6. Bruno Figlioli & Rafael Moreira Antonio & Fabiano Guasti Lima, 2019. "Stock Price Synchronicity and Current and Potential Credit Ratings," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 11(10), pages 1-16, October.
    7. Ala’a Adden Abuhommous & Ahmad Salim Alsaraireh & Huthaifa Alqaralleh, 2022. "The impact of working capital management on credit rating," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-20, December.
    8. Pertaia, Giorgi & Prokhorov, Artem & Uryasev, Stan, 2022. "A new approach to credit ratings," Journal of Banking & Finance, Elsevier, vol. 140(C).
    9. Abu Jalal & Shahriar Khaksari, 2019. "Effects of tuition discounting on university’s financial performance," Review of Quantitative Finance and Accounting, Springer, vol. 52(2), pages 439-466, February.
    10. Tabash, Mosab I. & Farooq, Umar & Ashfaq, Khurram & Tiwari, Aviral Kumar, 2022. "Economic policy uncertainty and financing structure: A new panel data evidence from selected Asian economies," Research in International Business and Finance, Elsevier, vol. 60(C).
    11. Yuchao Fan, 2022. "Dissecting the dot-com bubble in the 1990s NASDAQ," Papers 2206.14130, arXiv.org, revised Jul 2022.

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    More about this item

    Keywords

    Credit rating downgrades; Credit rating upgrades; Information asymmetry; Capital structure;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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