The Real Effects of Ratings Actions: Evidence from Corporate Asset Sales

We investigate whether and through which channel credit rating downgrades induce corporate restructurings. For a comprehensive sample, we find a strong and robust link between rating actions and subsequent restructuring activity and hypothesize these could be disciplinary (ex post efficient) or meant to counter tighter financial constraints (ex post inefficient). Based on the self-reported restructuring types and the choice of assets sold, we find evidence for rating-induced asset sales aimed to relax financial constraints. We find no evidence of firms addressing inefficiencies in their assets allocations as a result of rating actions. This paper was accepted by Victoria Ivashina, finance. Funding: F. Schlingemann gratefully acknowledges the financial support from the Barry J. Epstein Fellowship and the H.R. and Betty Young Fellowship. D. Bongaerts gratefully acknowledges the financial support from the Nederlandse Organisatie voor Wetenschappelijk Onderzoek Veni grant [Grant 016.135.059]. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2023.4754 .