Essays on the Role of Credit Ratings in Corporate Finance
Finanzmanagement, Band 98
Hamburg 2013, 204 Seiten
Agency-Konflikt, Agency Conflict, Costs of debit, Finanzmanagement, Fremdkapitalkosten, Investitionen, Investments, Kreditverträge, Loans, Monitoring, Performance Pricing, Rating Agencies, Ratingagenturen, Ratings
Rating agencies are important players in today’s financial markets. They have strong influence on companies’ costs of debt and investors’ decisions. However, rating agencies were and are not free of criticism. The conflict that emerges from the strong influence of credit ratings on firms, on the one hand, and the criticism against rating agencies, on the other hand, motivated this work. It consists of four articles which extend the research on credit ratings, contract theory, agency conflicts and the role of rating agencies in today‘s financial markets.
The first article examines a large sample of loans from North-American lenders to most precisely estimate the impact of a rating downgrade on firms‘ costs of debt. Exploiting provisions that link borrowers‘ interest spreads to their ratings (so called rating-based performance pricing) the article provides an accurate estimate of the direct and pure impact of ratings on interest spreads. The second article focuses on the observation that some companies get loan contracts that include rating-based performance pricing while others get loan contracts containing provisions that define variable interest spreads based on performance measured by accounting ratios (so called accounting-based performance pricing). It shows that accounting-based performance pricing and rating-based performance pricing contracts fulfill different functions and are therefore used for specific types of borrowers. The third article scrutinizes the influence of rating downgrades on firms‘ investment behavior. Based on previous literature it argues that rating agencies implicitly exercise a controlling function in favor of the bondholders. The article reveals that agencies‘ monitoring compensates the lack of investment restrictions in public debt agreements and thereby successfully mitigates agency conflicts. Further results provide evidence that a larger number of rating agencies and, hence, a higher competition among them might have negative effects for bondholders. The fourth article complements the findings of the third article. It analyzes the impact of rating agencies‘ actions on shareholder value. It demonstrates that firms with high agency conflicts are punished by rating agencies when taking excessive risks.
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