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Rating agencies play a crucial role in financial markets, significantly influencing companies' debt costs and investors' choices. Despite their importance, they face criticism, particularly regarding their substantial impact on firms. This work consists of four articles that delve into credit ratings, contract theory, agency conflicts, and the agencies' roles in modern markets. The first article analyzes a large sample of loans from North American lenders to estimate the effects of rating downgrades on debt costs, utilizing provisions that link interest spreads to ratings, thereby providing a precise measure of ratings' direct impact. The second article contrasts companies with loan contracts featuring rating-based performance pricing against those with accounting-based performance pricing, demonstrating that these contracts serve distinct functions tailored to specific borrower types. The third article investigates how rating downgrades affect firms' investment behaviors, suggesting that agencies act as implicit monitors favoring bondholders, thus alleviating agency conflicts. It also indicates that increased competition among rating agencies may adversely affect bondholders. The fourth article builds on these findings, exploring how rating agencies influence shareholder value, revealing that firms with significant agency conflicts face penalties from agencies for taking excessive risks.
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Essays on the role of credit ratings in corporate finance, Markus Wiemann
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- Pubblicato
- 2013
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