Do Regulations Based on Credit Ratings Affect a Firms Cost of Capital?
Author InfoDarren J. Kisgen Philip E. Strahan Abstract In February 2003, the SEC officially certified a fourth credit rating agency, Dominion Bond Rating Service (“DBRS”), for use in bond investment regulations. After DBRS certification, bond yields change in the direction implied by the firm’s DBRS rating relative to its ratings from other certified rating agencies. A one notch better DBRS rating corresponds to a 39 basis point reduction in a firm’s debt cost of capital. The impact on yields is driven by cases where the DBRS rating is better than other ratings and is larger among bonds rated near the investment-grade cutoff. These findings indicate that ratings-based regulations on bond investment affect a firm’s cost of debt capital. Download InfoTo download: If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help pa
