“ The Real and Financial Effects of Credit Ratings : Evidence from Moody ’ s Adjustments ”

Moody’s adjusts a firm’s reported leverage across several dimensions to determine credit ratings. I find that changes to these adjustments affect firm capital structure and investment decisions, especially for firms near the investment grade boundary and with bond covenants containing ratings triggers. Further, in 2006, Moody’s made several changes to its adjustment methodologies. I find that changes to adjustments made in 2006 affect capital structure and investment decisions in 2007. Firms most affected by these methodology changes in 2006 also alter their financing and investment behavior as predicted. These results show that rating agencies have the power to affect firm financing and real decisions. Kisgen is at Boston College Carroll School of Management and may be reached at [email protected]. This paper has benefited from the insightful comments of David Chapman, Jonathan Reuter, Philip Strahan, and seminar participants at Boston College, The Pennsylvania State University, the University of Florida, and the University of Missouri.