Do managers strategically make voluntary disclosures to influence credit ratings, and how?

What is it about?

Credit ratings are important to a firm due to their impact on stock and bond valuations, as well as to the regulatory and contractual costs (benefits) associated with a credit rating change (e.g., Kisgen, 2006; Kisgen, 2009). Therefore, managers have an incentive to improve their credit ratings through influencing rating agencies’ perceptions about firm credit quality. One way of affecting credit ratings is to strategically alter voluntary disclosure policies that are associated with a firm's creditworthiness. My empirical findings suggest that firms tend to commit to credible information disclosures to affect rating agencies’ perceptions. In particular, firms near a rating change have a higher incidence of a disclosure regarding product and business expansion plans. Such an incidence is more evident for firms that are subject to lower proprietary costs of disclosures. However, firms close to a rating change do not appear to selectively release good news or suppress bad news on product and business expansion.

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Why is it important?

Credit rating is not only important to a firm in terms of its financing for operations and investments, but also widely used by outsiders for valuation, investment, regulatory, and contractual purposes. My study shed light on how managers take advantage of voluntary disclosures to fulfil their incentives for a desired credit rating.

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