Working Papers
Please find here my current working papers:
Credit ratings and abnormal investment behavior
(First draft May 16 2024) [presentation slides]
I examine how rating downgrades impact firms’ investment efficiency. Using fourth fiscal quarter capital expenditure spikes, typically linked to budget policy and tax strategies, I show firms reduce their abnormal investments by −24.4% following downgrades. This decrease is especially pronounced for financially constrained firms and those facing budgeting complexity, suggesting improvements in “use it or lose it” policies. Investment rates unaffected by investment spikes remain constant following downgrades. Firms decreasing abnormal investments face a lower downgrade likelihood. Moreover, stock market reaction is more muted around downgrade announcements when firms have larger investment spikes, indicating downgrades efficiently discipline corporate investment decision-making.
More than a Letter: Evidence on the Determinants and Impact of Credit Rating Report Content
(co-authored with Darren J. Kisgen, updated June 12 2024)
We examine the variation in information contained in rating reports, distinct from the letter rating. Specifically, we examine the clarity, length, numerical content, uncertainty, and uniqueness of Moody’s rating reports. We first document that rating content matters. Stock market reactions to rating changes are significantly affected by rating content, and rating content predicts future rating changes. We next show that analyst fixed effects explain about 20% of content variation. Finally, we find that the information quality contained in rating reports significantly improves with increased litigation risk following the Dodd-Frank Act, especially for ratings that diverge from expectations.
Do acquirers care about credit ratings? Evidence from credit rating watches
(co-authored with Kevin Riehl, updated January 17 2024)
We analyze corporate acquisition announcements and the feedback of credit rating agencies by placing the acquirer's issuer rating under formal review for a potential change. We show that acquisitions are more likely to be withdrawn if the firm's rating is placed on review for downgrade. Focusing on completed acquisitions, deals associated with reviews for downgrade need approximately 40% more time to be completed, and acquirers are twice as likely to be downgraded in the first two years (41% versus 23%). The stock market considers the probability of an acquirer's downgrade as deals with increased downgrade risk show lower abnormal returns. We do not find evidence that reviews of rating agencies are anticipated by firms.
Shareholder-connected Director Appointments: Evidence from Cross-ownership
(co-authored with Yang Cao, updated May 16 2024) [presentation slides]
We explore how cross-ownership affects non-executive director appointments. Using investor cross-ownership to proxy candidate connections to shareholders, we analyze 18,371 appointed directors against a pool of 329,521 potential counterfactual candidates. Our findings show a positive link between shareholder connections and director appointments. Firms with governance concerns tend to appoint connected directors, which shareholders perceive favorably, leading to improved stock returns and voting support. These appointments improve corporate governance and increase capital expenditures. Directors benefit from increased external job prospects and higher internal compensation.