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Discussion Paper Details

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Title: Have Rating Agencies Become More Conservative? Implications for Capital Structure and Debt Pricing

Author(s): Ramin P. Baghai, Henri Servaes and Ane Tamayo

Publication Date: June 2011

Keyword(s): Capital structure, Credit ratings, Debt issues and Debt spreads

Programme Area(s): Financial Economics

Abstract: We document that rating agencies have become more conservative in assigning ratings to corporate bonds over the period 1985 to 2009. Holding firm characteristics constant, average ratings have dropped by 3 notches (e.g., from A+ to BBB+) over time. This increased stringency has affected both capital structure and debt spreads. Firms that suffer most from this conservatism issue less debt and have lower leverage. However, their debt spreads are lower compared to the spreads of firms that have not suffered from this conservatism, which implies that the market partly undoes the impact of conservatism on debt prices. This evidence suggests that firms and capital markets do not perceive that the increase in conservatism is fully warranted.

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Bibliographic Reference

Baghai, R, Servaes, H and Tamayo, A. 2011. 'Have Rating Agencies Become More Conservative? Implications for Capital Structure and Debt Pricing'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8446