Credit Ratings and the Cost of Issuing Seasoned Equity

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Abstract

I examine the effects of issuer credit ratings on the costs associated with seasoned equity offerings (SEOs). The evidence from a panel of SEOs from 1990 to 2014 shows that when firms issue seasoned equity, those with issuer credit ratings pay reduced investment banking fees. I confirm these results by conducting a propensity-score matched-sample comparison analysis of firms that obtain new, long-term issuer credit ratings with an unrated control group. Controlling for known determinants of SEO fees, I find that firms that obtain a new credit rating before issuing seasoned equity pay significantly reduced investment banking fees. In economic terms, underwriting fees for newly rated firms are 7.2% lower than those for similar, yet unrated firms. Finally, I examine the indirect costs of issuance and find evidence that credit-rated firms face reduced market-based costs to issue. Rated firms incur lower dilutionary costs to issue and have more positive abnormal returns surrounding the issue.

Original languageAmerican English
Pages (from-to)303-330
Number of pages28
JournalJournal of Financial Research
Volume42
Issue number2
DOIs
StatePublished - Jun 2019

Keywords

  • credit ratings
  • information asymmetry
  • seasoned equity offerings
  • value certainty

EGS Disciplines

  • Finance and Financial Management

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