The Impact of Split Credit Ratings on U.S. Corporates: Cost of Capital, Capital Structure and Debt Maturity

Electronic versions


  • Anh Quang Nguyen

    Research areas

  • PhD, Bangor Business School, credit ratings, split ratings, information assymmetry, cost of capital, capital structure, debt maturity


It is common practice for U.S. firms to solicit multiple ratings, normally from the two largest international credit rating agencies (CRAs), namely Moody’s and S&P. It is reported that these two CRAs disagree on U.S. firms’ ratings for a majority of sampled observations. This thesis investigates the effect of the two major CRAs’ disagreements about firms’ creditworthiness (split ratings) upon firms’ cost of equity capital, debt maturity decisions and capital structure decisions. The thesis uses an initial dataset comprising all U.S. corporations rated by both Moody’s and S&P during the period from 2003 to 2015 (to 2017 for Chapter 3). Various methodologies are employed to address the research questions, namely cross-sectional regression models, Ordinary Least Squares (OLS), the Tobit model, the Generalised Linear Model (GLM) and propensity score matching (PSM). The first empirical chapter focuses on the impact of split ratings on the cost of equity capital and provides evidence that equity investors recognise the differences between Moody’s and S&P’s opinions about firms’ credit risk and demand premiums for that uncertainty surrounding firms’ creditworthiness. Equity investors are more sensitive to adverse selection/information asymmetry problems than are bond investors; thus, split ratings (as a signal of information opaqueness or information asymmetry) induce equity investors to require a higher cost of equity capital for split rated firms than non-split rated firms. In addition, equity investors put more weight on S&P, a more generous CRA, when assessing firms’ cost of equity capital. The second empirical chapter examines the impact of split ratings on firms’ debt maturity decisions and provides evidence that split rated firms’ behaviour regarding debt maturity is different from that of non-split rated firms. Split rated firms seem more concerned about the rollover risk arising from future unfavourable rating changes than the increase in long-term borrowing cost arising from split ratings. Therefore, they are more likely to issue a higher proportion of long-term debt than non-split rated firms. Firms place more emphasis on Moody’s ratings, a more conservative CRA, when deciding on debt maturity structure. The third empirical chapter focuses on the impact of split ratings on firms’ capital structure and finds evidence that split rated firms rely more on debt financing than equity financing. The results suggest that firms are more concerned about the adverse selection and information asymmetry problems signalled by split ratings than the increased borrowing cost arising from split ratings. In contrast to the first two empirical chapters, firms do not differentiate between Moody’s and S&P when assessing optimal capital structure decisions. This thesis highlights drawbacks in the current common practice of researchers and regulators to treat the two major CRAs equally. The thesis reports evidence of systematic differences between the two CRAs and their differing credit opinions reveals additional implications that have a significant impact on firms’ and investors’ behaviour.


Original languageEnglish
Awarding Institution
Award date3 Feb 2020