An investigation of the asymmetric link between credit re-ratings and corporate financial decisions: "Flicking the switch" with financial flexibility

Mahmoud Agha, Robert Faff*

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

9 Citations (Scopus)

Abstract

Using a large sample of non-financial US listed firms over the period from 1985 to 2009, we analyze the interactive effect of financial flexibility and credit re-ratings on corporate investment and financing decisions. Essentially, we document that financial flexibility (inflexibility) "flicks the switch" in the re-rating upgrades (downgrades) scenario. Specifically, a credit rating upgrade (downgrade) for financially flexible firms is followed by a reduction (no change) in their cost of capital, an increase (no change) in their capital expenditure and an increase (no change) in their net debt versus net equity issuance. In contrast, a rating upgrade (downgrade) for financially inflexible firms is followed by an insignificant change (an increase) in their cost of capital, an insignificant change (a decrease) in their capital expenditure and an insignificant change (a decrease) in their net debt versus net equity issuance. We offer plausible explanations for these asymmetric relations.

Original languageEnglish
Pages (from-to)37-57
Number of pages21
JournalJournal of Corporate Finance
Volume29
DOIs
Publication statusPublished - 1 Dec 2014
Externally publishedYes

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