The Mitigating Effect of Bank Financing on Shareholder Value and Firm Policies Following Rating Downgrades

Abstract

To cite this version:Mascia Bedendo, Linus Siming. The mitigating effect of bank financing on shareholder value and firm policies following rating downgrades. Journal of Corporate Finance, Elsevier, 2018Elsevier, , 48, pp.94 -108. 10.1016Elsevier, /j.jcorpfin.2017 The mitigating effect of bank financing on shareholder value and firm policies following rating downgrades AbstractWe document that shareholders of high-yield firms are less sensitive to credit rating downgrades the higher the proportion of bank financing in the firm. This positive effect is linked to firm behavior. In the year after the downgrade, high-yield firms with large bank debt ratios i) need to reduce their leverage less, and ii) display higher capital expenditures, compared to peers that rely relatively more on other sources of debt. Bank financing thus helps alleviate the adverse effects of rating downgrades on shareholders and firms in the high-yield segment. As such, one may view our findings as new evidence of the "specialness" and flexibility of bank debt.

Do Firms Adjust Corporate Social Responsibility Engagement After a Focal Change in Credit Ratings?

“…For example, Kisgen (2006, 2009) finds that firms reduce leverage before anticipated or after real rating downgrades and this behavior is more pronounced for firms around the investment–speculative grade cutoff. Chernenko and Sunderam (2012) show that irrespective of firms’ credit quality, a “discrete change in label” from investment to speculative grade is negatively related to capital expenditures, whereas Bedendo and Siming (2018) show that after rating downgrades, firms reduce capital expenditures. Alissa and colleagues (2013) and Brown and colleagues (2015) investigate whether firms use earnings management policies to influence credit ratings, and find that firms around the investment–speculative grade threshold use more aggressive earnings’ management than other firms.…”

“…In this study, we are interested in firms' CSR engagement policies as a response to focal credit rating changes and in the ex post effects these policies may have for credit ratings. The credit ratings literature suggests that firms adjust corporate policies (capital structure, investment, and accounting practices) to maintain or improve credit ratings (Agha & Faff, 2014;Alissa et al, 2013;Bedendo & Siming, 2018;Brown et al, 2015;Chernenko & Sunderam, 2012;Jung et al, 2013;Kisgen, 2006Kisgen, , 2007Kisgen, , 2009.…”

Why do firms issue guaranteed bonds?

“…As a measure of default risk, firm rating is a common proxy of the financial constraints (Bedendo and Siming, 2018). We set a numerical score of 26 for AAA rated bonds and 1 for bonds receiving a rating of D.…”