Federal Dposit InsuranceCorporation• Center for Financial Researchh
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2008-04
How Do Managers Target Their Credit Ratings?
A Study of Credit Ratings and Managerial Discretion
February 2008
Empirical Comparisons and Implied Recovery Rates
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An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
September 2005
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2008-04
How Do Managers Target Their Credit Ratings?
A Study of Credit Ratings and Managerial Discretion
February 2008
Empirical Comparisons and Implied Recovery Rates
kkk
An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
September 2005
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How Do Managers Target Their Credit Ratings?
A Study of Credit Ratings and Managerial Discretion
Armen Hovakimian*
Baruch College
Ayla Kayhan**
Louisiana State University
and
Sheridan Titman***
University of Texas at Austin and NBER
February 28, 2008
Abstract
Managers choose credit rating targets by tradin g off the benefits associated with a high
rating against the higher cost of capital associated with the additional equity required to
maintain the high rating. We find that small and risky firms tend to target lower ratings,
whereas firms with high growth opportunities tend to target higher ratings. In addition,
firms with small boards and large blockholders tend to target lower ratings. We also find
that deviations from rating targets influen ce subsequent capital st ructure choices. When
observed ratings are below (above) the target, managers tend to make security issuance
and repurchase decisions that reduce (increase) leverage. In addition, firms are more
likely to increase dividend payouts when they have above target ratings and are less
likely to make acquisitions when they have below target ratings.
* Zicklin School of Business, Baruch College, New York, NY 10010. Tel: (646) 312-3490; fax: (646) 312-
3451; e-mail: Armen_Hovakimian@baruch.cuny.edu.
** Louisiana State University, E. J. Ourso School of Business, Department of Finance, Baton Rouge, LA
70803. Tel: (225) 578-6236; fax: (225) 578-6366; e-mail: AKayhan@lsu.edu.
*** University of Texas at Austin - Department of Finance, Red McCombs School of Business, Austin, TX
78712. Tel: (512) 232-2787; fax: (512) 471-5073; e-mail: Sheridan.Titman@mccombs.utexas.edu
A Study of Credit Ratings and Managerial Discretion
Armen Hovakimian*
Baruch College
Ayla Kayhan**
Louisiana State University
and
Sheridan Titman***
University of Texas at Austin and NBER
February 28, 2008
Abstract
Managers choose credit rating targets by tradin g off the benefits associated with a high
rating against the higher cost of capital associated with the additional equity required to
maintain the high rating. We find that small and risky firms tend to target lower ratings,
whereas firms with high growth opportunities tend to target higher ratings. In addition,
firms with small boards and large blockholders tend to target lower ratings. We also find
that deviations from rating targets influen ce subsequent capital st ructure choices. When
observed ratings are below (above) the target, managers tend to make security issuance
and repurchase decisions that reduce (increase) leverage. In addition, firms are more
likely to increase dividend payouts when they have above target ratings and are less
likely to make acquisitions when they have below target ratings.
* Zicklin School of Business, Baruch College, New York, NY 10010. Tel: (646) 312-3490; fax: (646) 312-
3451; e-mail: Armen_Hovakimian@baruch.cuny.edu.
** Louisiana State University, E. J. Ourso School of Business, Department of Finance, Baton Rouge, LA
70803. Tel: (225) 578-6236; fax: (225) 578-6366; e-mail: AKayhan@lsu.edu.
*** University of Texas at Austin - Department of Finance, Red McCombs School of Business, Austin, TX
78712. Tel: (512) 232-2787; fax: (512) 471-5073; e-mail: Sheridan.Titman@mccombs.utexas.edu