Strategic archetypes, credit ratings, and cost of debt

Man Dang*, Premkanth Puwanenthiren, Edward Jones, Thieu Quang Nguyen, Xuan Vin Vo, Sivathaasan Nadarajah

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

Despite the theoretical and empirical controversy about rating agencies’ reputational issues, credit ratings have far-reaching implications for financing and investment decisions. However, the relationship between strategic behavior and credit ratings remains largely unexplored. Using a large sample of U.S. non-financial firms between 1981 and 2016, we examine how established archetypes of strategic behavior in business affect firms’ credit ratings. We document that firms with prospector type strategies experience significantly lower credit ratings than firms which are identified as defenders and analyzers. The negative effect on credit ratings is more pronounced for firms operating in weaker governance environments and during periods of high economic policy uncertainty. Further, we find that prospector type firms with weaker credit ratings have a higher cost of debt. Our results hold after accounting for endogeneity concerns and self-selection bias. Overall, our findings emphasize that more transparent and stringent governance can enhance ratings of prospector firms.
Original languageEnglish
Article number105917
JournalEconomic Modelling
Volume114
Early online date3 Jun 2022
DOIs
Publication statusE-pub ahead of print - 3 Jun 2022

Keywords

  • Corporate governance
  • Cost of debt
  • Credit ratings
  • Information environment
  • Policy uncertainty
  • Strategic archetypes

ASJC Scopus subject areas

  • Economics and Econometrics

Fingerprint

Dive into the research topics of 'Strategic archetypes, credit ratings, and cost of debt'. Together they form a unique fingerprint.

Cite this