Finance Seminar: Associate Professor Darren Kisgen
The Impact of Credit Ratings on Corporate Behavior: Evidence from Moody’s Adjustments
Moody’s adjusts a firm’s reported leverage across several dimensions to determine credit ratings.I find that changes to this adjustment methodology affect 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 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 corporate decisions.