Managing for Ratings: Real Effects of a Corporate Ratings Criteria Change

We exploit a change in criteria by Standard and Poor's to examine the real effects of an exogenous credit ratings change on corporate policies. We use a criteria recalibration by Standard and Poor's, unrelated to firms' fundamentals, as a quasi-natural experiment to analyze the impact of a ratings upgrade on issuance activity, investment rate, cash holdings, and payout policy of companies. Our findings suggest that upgraded firms subsequently issue more debt relative to equity, increase their investment rate, and decreasing their cash holdings. We find limited evidence that firms increase their payout to shareholders. In addition we find upgraded firms issue public bonds at lower yields. Our results support the view that credit ratings have a real effect on corporations.