Published on 4 July 2022
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Credit ratings and capital structure: New evidence from overconfident CFOs

Abstract

We investigate 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.

Read blog: Credit ratings and capital structure: New evidence from overconfident CFOs


Keywords: credit ratings, corporate finance, capital structure, behavioural finance, CEO overconfidence, CFO overconfidence

JEL classification: G24, G32, G40


Authors

Patrycja Klusak

Dr Patrycja Klusak

Affiliated Researcher

Dr Patrycja Klusak is an Associate Professor at Norwich Business School at University of East Anglia and an Affiliated Researcher at Bennett Institute for Public Policy at the University of...

Shee Yee Khoo

Shee Yee Khoo is a Lecturer in Finance at Bangor University. Her research areas of interest are corporate finance, behavioural finance and credit ratings.

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...

Dr Panagiotis Andrikopoulos

Panagiotis Andrikopoulos is the Executive Director of the Centre for Financial and Corporate Integrity (CFCI) at Coventry Business School and a Professor of Finance. Prior to joining the CFCI, he...

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