Peer firms’ credit rating changes and corporate financing

Hung, C.-H. D. , Naeem, S. and Wei, K.C. J. (2020) Peer firms’ credit rating changes and corporate financing. European Journal of Finance, 26(1), pp. 41-63. (doi:10.1080/1351847X.2019.1683874)

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Abstract

We find that firms reduce net debt issuance (NDI, hereafter) when industry peers with the same credit rating were downgraded in the previous year, as opposed to an average NDI increase among all firms. This finding is consistent with the considerations of competition and contagion associated with relative strengths and weaknesses in credit quality. The peer effect on NDI reduction is ubiquitous across both speculative- and investment-grade firms, but is particularly strong for small size firms with speculative-grade ratings, and firms operating in concentrated industries, and in times when the economy is in expansion or outside financial crises. We also find that firms reduce leverage when their ratings are lower than the industry average, and that peer firms’ rating effects remain strong even when controlling for the lower-than-average effect.

Item Type:Articles
Additional Information:Chi-Hsiou Hung acknowledges financial support from grants in 2014 and 2015 from the Wards Trust Fund. John Wei acknowledges partial financial support in the form of a Research Infrastructure Grant from Hong Kong’s Research Grants Council from Hong Kong University of Science & Technology (RI/93/94.BM02).
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Hung, Dr Daniel and Naeem, Dr Shammyla
Authors: Hung, C.-H. D., Naeem, S., and Wei, K.C. J.
College/School:College of Social Sciences > Adam Smith Business School > Accounting and Finance
Journal Name:European Journal of Finance
Publisher:Taylor and Francis
ISSN:1351-847X
ISSN (Online):1466-4364
Published Online:30 October 2019
Copyright Holders:Copyright © 2019 Informa UK Limited, trading as Taylor and Francis Group
First Published:First published in European Journal of Finance 26(1):41-63
Publisher Policy:Reproduced in accordance with the publisher copyright policy

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