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


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


Patrycja Klusak

Prof Patrycja Klusak

Affiliated Researcher

Pati Klusak is a co-founder and director of Wealth Fair Economics, Professor in Accounting and Finance at Edinburgh Business School at Heriot-Watt University and an Affiliated Researcher at Bennett Institute...

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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