TY - CONF

T1 - Credit Ratings and Capital Structure: New Evidence from Overconfident CFOs

AU - Khoo, Shee-Yee

AU - Vu, Huong

AU - Andrikopoulos, Panagiotis

AU - Klusak, Patrycja

PY - 2022/9

Y1 - 2022/9

N2 - For the first time we investigate the impact of credit rating changes on the financing decisions of overconfident CFOs. We find that CFO overconfidence significantly increases the sensitivity of net debt issuances to the rating changes, particularly when firms have no access to low-risk debt. Specifically, we establish that speculative-grade firms with overconfident CFOs reduce net debt issuance following rating changes (i.e., upgrades and downgrades). Our results hold after controlling for CEO bias. Furthermore, we document that CEO overconfidence has explanatory power on firm financing policies as it generates the potential multiplier effect on debt conservatism, as well as on investment return.

AB - For the first time we investigate the impact of credit rating changes on the financing decisions of overconfident CFOs. We find that CFO overconfidence significantly increases the sensitivity of net debt issuances to the rating changes, particularly when firms have no access to low-risk debt. Specifically, we establish that speculative-grade firms with overconfident CFOs reduce net debt issuance following rating changes (i.e., upgrades and downgrades). Our results hold after controlling for CEO bias. Furthermore, we document that CEO overconfidence has explanatory power on firm financing policies as it generates the potential multiplier effect on debt conservatism, as well as on investment return.

M3 - Paper

T2 - The BAFA FMI SIG and Northern Area Group Annual Conference 2022

Y2 - 14 September 2022 through 15 September 2022

ER -