How creditor rights affect the issuance of public debt: The role of credit ratings

Gu, Xian; Kadiyala, Padma; Mahaney-Walter, Xin Wu

Abstract

We propose that credit ratings act as an information channel which, combined with more power being given to creditors by countries strengthening creditor rights, leads to an increase in the supply of public debt. From a firm-level dataset covering 51 developed and developing countries for 1989 through 2013, we find that in countries with stronger creditor rights, firms tend to have higher credit ratings. We confirm that in these countries, firms with higher credit ratings exhibit a greater issuance of public debt than that of equity. As further evidence that credit ratings reduce agency costs of debt, we find that improvements in creditor rights and resulting higher credit ratings increase capital expenditures among firms experiencing severe bondholder-shareholder conflicts.

Citation

Gu, X., Kadiyala, P., & Mahaney-Walter, X. W. (2018). How creditor rights affect the issuance of public debt: The role of credit ratings. Journal of Financial Stability, 39, 133-143. https://doi.org/10.1016/j.jfs.2018.11.001

• Journal Article Type: Article
• Acceptance Date: Nov 1, 2018
• Online Publication Date: Nov 3, 2018
• Publication Date: 2018-12
• Deposit Date: Aug 4, 2020
• Publicly Available Date: Aug 4, 2020
• Journal: Journal of Financial Stability
• Print ISSN: 1572-3089
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 39
• Pages: 133-143
• DOI: https://doi.org/10.1016/j.jfs.2018.11.001
• Public URL: https://durham-repository.worktribe.com/output/1264507