Have Rating Agencies Become More Conservative? Implications for Capital Structure and Debt Pricing





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    • Baghai is at the Stockholm School of Economics. Servaes is at the London Business School. Tamayo is at the London School of Economics. Servaes is also affiliated with CEPR and ECGI. We would like to thank two anonymous referees, an anonymous Associate Editor, Aysun Alp, João Cocco, Paolo Colla, David Gillmor, Cam Harvey, Craig MacKinlay, Igor Makarov, Paolo Pasquariello, Stephen Schaefer, Denis Sosyura, Ilya Strebulaev, Yili Zhang, and seminar participants at Aalto University, the 2010 Australasian Banking and Finance Conference, Bocconi University, Instituto de Empresa, London Business School, the NBER 2010 Corporate Finance Summer Institute, the University of Bristol, the University of Lausanne/EPFL, the University of Michigan, and Sabanci University for useful comments and discussions. We would also like to thank Stefano Cascino and Brandon Julio for their help with the data. Raja Patnaik provided excellent research assistance.


Rating agencies have become more conservative in assigning corporate credit ratings over the period 1985 to 2009; holding firm characteristics constant, average ratings have dropped by three notches. This change does not appear to be fully warranted because defaults have declined over this period. Firms affected more by conservatism issue less debt, have lower leverage, hold more cash, are less likely to obtain a debt rating, and experience lower growth. Their debt spreads are lower than those of unaffected firms with the same rating, which implies that the market partly undoes the impact of conservatism on debt prices. This evidence suggests that firms and capital markets do not perceive the increase in conservatism to be fully warranted.