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Debt Structure and Credit Ratings

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  • Mascia Bedendo
  • Linus Siming

Abstract

We investigate whether a ?rm’s debt structure can act as a mitigating factor to the negative e?ects of a corporate rating downgrade. Speci?cally, we study how a ?rm’s relative mix of bank and non-bank ?nancing a?ects its stock market valuation and leverage adjustment following a downgrade. We document that, in the high-yield segment, companies with a larger proportion of bank debt su?er less from the distorting e?ects of rating downgrades, as they: (i) experience less negative abnormal stock returns around the event; (ii) reduce their market leverage less than peers that rely more on other sources of debt. Our ?ndings con?rm the bene?ts of bank ?nancing for risky ?rms and provide a number of new insights into how debt structure a?ects ?rm value and capital structure decisions over and above the information directly embedded in credit ratings.

Suggested Citation

  • Mascia Bedendo & Linus Siming, 2016. "Debt Structure and Credit Ratings," BAFFI CAREFIN Working Papers 1622, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    • Handle: RePEc:baf:cbafwp:cbafwp1622
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    References listed on IDEAS

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    Cited by:

    1. Faiza Sajjad & Muhammad Zakaria, 2018. "Credit Ratings and Liquidity Risk for the Optimization of Debt Maturity Structure," JRFM, MDPI, vol. 11(2), pages 1-16, May.

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    More about this item

    Keywords

    Credit rating agencies; Market reaction; Debt structure;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • 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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