The Impact of Credit Ratings on Corporate Behavior
Moody’s adjusts a firm’s reported leverage across several dimensions to determine credit ratings. I find that changes to this adjustment methodology affects firm capital structure and investment decisions. In particular, in 2006, Moody’s made several changes to its adjustment methodologies, which are arguably exogenous to changes in firm fundamentals. I first show these changes significantly affected adjustments for firms in this year. I then show that these changes to adjustments made in 2006 affect capital structure and investment decisions in 2007, especially for those firms most affected by these methodology changes. These results show that rating agencies have the power to affect firm financing and real decisions.
Dr Chau Chak Wing Building