Publications

Credit ratings and capital structure: New evidence from overconfident CFOs

Download
Abstract

In this paper, we examine the impact of credit rating changes on the financing decisions of overconfident CFOs. We find that CFO overconfidence significantly increases the sensitivity of net debt issuances to the rating changes, particularly when firms have no access to low-risk debt. Specifically, we establish that speculative-grade firms with overconfident CFOs reduce net debt issuance following rating changes (i.e. upgrades and downgrades). Our results hold after controlling for CEO bias. Furthermore, we document that CEO overconfidence has explanatory power on firm financing policies as it generates the potential multiplier effect on debt conservatism, as well as on investment return. Findings of our paper are robust to model specifications and to the endogeneity bias.

Download

  • About the author

    Dr Patrycja Klusak, Affiliated Researcher

    Dr Patrycja Klusak is a lecturer in Banking and Finance at University of East Anglia and an Affiliated Researcher at Bennett Institute for Public Policy at the University of Cambridge.   Learn more

    Patrycja Klusak
  • About the author

    Dr Huong Vu

    Dr Huong Vu is a Lecturer in Finance at University of Aberdeen. She joined the University of Aberdeen in September 2018. Prior to that, Dr Huong Vu had three years of experience as a lecturer in finance at Coventry Business School. Dr Huong Vu got her Bachelor Degree in Economics from the Foreign Trade University, Vietnam in 2006. Then, she did her Master Degree and PhD in Finance at Bangor Business School, Bangor University from 2008 to 2014. Dr Huong Vu's PhD research addressed the causes and implications of split sovereign credit ratings for financial markets. In recent years, her research interests span different areas of finance including sovereign credit risk, credit ratings and corporate finance.

  • About the author

    Shee Yee Khoo

    Shee Yee Khoo is a PhD candidate in Finance University of Aberdeen. Her research areas of interest are corporate finance, behavioural finance and credit ratings.