Working paper/research report

Authors list: Bannier, Christina E.; Hirsch, Christian, W.; Wiemann, M.

Publication year: 2012

DOI Link: https://doi.org/10.2139/ssrn.2135483

Abstract: 

Agency conflicts may induce managers to choose inefficiently risky investment projects that benefit stockholders at the expense of debtholders. While private debt contracts often contain covenants restricting investment choices, public debt rarely does. We therefore examine whether credit rating agencies exercise a disciplining function on behalf of the bondholders. We show that, indeed, firms reduce (raise) their investment rates around negative (positive) rating events. This investment reaction is independent of changes in performance, investment opportunities, capital costs, or target rating strategies. It is strongest for firms with high agency conflicts. We also demonstrate that increasing competition among credit rating agencies reduces the monitoring effect. Higher rating competition, fostered by regulatory action, might therefore harm the beneficial and so far unrecognized real impact of the industry.

Harvard Citation style: Bannier, C., Hirsch, C. and Wiemann, M. (2012) Do Credit Ratings Affect Firm Investments? The Monitoring Role of Rating Agencies. SSRN. https://doi.org/10.2139/ssrn.2135483

APA Citation style: Bannier, C., Hirsch, C., & Wiemann, M. (2012). Do Credit Ratings Affect Firm Investments? The Monitoring Role of Rating Agencies. SSRN. https://doi.org/10.2139/ssrn.2135483