Do ratings matter? An examination of nonrated firms

Abstract

I attempt to add to the credit rating literature by empirically testing a hitherto untapped sample. While increased attention is being paid to credit rating agencies through academic studies, the examination of nonrated firms has yet to be investigated. An analysis of this subset of firms can begin to answer the question of whether firms are responding to some omitted variable, rather than an adherence or preference for a credit rating. After creating hypothetical ratings for a nonrated sample, I examine if these firms react in a similar fashion to credit rating threats as do rated firms since a response to a rating stimulus by a nonrated firm that is qualitatively similar to a rated firm would open up a new argument against firms’ regard for ratings. My results alleviate the concern of firm response to an omitted variable.

Keywords:

• credit ratings
• capital structure

JEL Classification:

• G32

Notes

¹ For example, Dodd–Frank legislation called for the creation of an Office of Credit Ratings.

² The model also forces the constant to zero; and Debt/Capitalization ratios greater than 1 and less than 0 are removed.

³ Coefficients are not presented in this article, but are available upon request.

⁴ To increase the effectiveness of the RE/TA, EBIT/TA and ME/BL variables in the logit model estimate, the variables are log-transformed as follows: RE/TA → – ln(1 – RE/TA), EBIT/TA → – ln(1 – EBIT/TA) and ME/BL → 1 + ln(ME/BL).

⁵ Calculated coefficients and boundaries are not presented, but are available upon request.

⁶ Results are available upon request.

⁷ Results are available upon request.