Please use this identifier to cite or link to this item: http://hdl.handle.net/10125/64894

The Economic Consequences of Corporate Credit Rating Errors

File Size Format  
HARC 2020 paper 208.pdf 477.91 kB Adobe PDF View/Open

Item Summary

Title:The Economic Consequences of Corporate Credit Rating Errors
Authors:James Naughton
Riddha Basu
Keywords:Corporate credit ratings
off-balance-sheet finance
pension accounting
SFAS158
Date Issued:30 Aug 2019
Abstract:We show that errors by credit rating agencies can have significant real effects on rated firms. Specifically, we find that firms increase investment and adjust their capital structure following an exogenous correction to the credit rating adjustment process that occurred through the implementation of Financial Accounting Standards Board Statement No. 158 (“SFAS158”). Prior to SFAS158, Moody’s and S&P did not correctly account for the presence of minimum liability adjustments for off-balance sheet pension obligations. Since neither firms nor the rating agencies were aware of this error, SFAS158 exogenously corrected the errors in the rating agency adjustments, thus allowing us to identify the effect of changes in credit rating labels independent of changes in firm fundamentals. We show that firms with higher minimum liability adjustments pre-SFAS158 are more likely to experience an improvement in credit rating post-SFAS158 relative to low minimum liability adjustment firms even though there is no detectable change in the credit quality of these firms relative to low minimum liability adjustment firms. In addition, firms with larger minimum liability adjustments are more likely to increase capital investment and shift capital structure toward debt financing post-SFAS158 relative to low minimum liability adjustment firms. Overall, our results indicate that credit rating errors have real economic consequences for rated firms because credit rating labels drive economic choices that are independent of firm fundamentals.
URI:http://hdl.handle.net/10125/64894
Appears in Collections: 05 Financial: Debt Market Research (Including Credit Ratings/Debt Contracts)


Please email libraryada-l@lists.hawaii.edu if you need this content in ADA-compliant format.

Items in ScholarSpace are protected by copyright, with all rights reserved, unless otherwise indicated.