Hong Bo, Robert Lensink, Victor Murinde :
077_DP95 Credit Ratings and Corporate Investment: UK Evidence
JEL Classification:
G240, G310, M510
Abstract:
We investigate the effect of credit ratings on corporate investment. We extend the conventional view, which predicts a positive linear relationship between credit ratings and firm investment, by highlighting a perspective of corporate governance that emphasizes the impact of managerial career concerns. The evidence from a panel of 576 UK public nonfinancial firms during 1996-2004 shows that in addition to the conventional view, there are several other possibilities which describe the
relation between credit ratings and fixed investment. Specifically, we find that: (a) the relation between credit ratings and investment may be nonlinear and can be represented by an inverted U curve; (b) changes in credit ratings are negatively associated with investment; (c) the negative effect of the changes in credit ratings on investment is exacerbated by high levels of credit ratings; and (d) the results in (b) and (c) are more pronounced for firms that are facing credit ratings upgrades.
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