The Real Effects of Credit Ratings: Evidence From Corporate Asset Sales

We provide empirical evidence on the role credit rating agencies play as dedicated monitors. We find that firms are significantly more likely to conduct an asset sale following a credit rating downgrade. Shareholder wealth effects at the announcement of an asset sale and the likelihood of divesting relatively poorly performing assets is significantly higher when an asset sale is preceded by a credit rating downgrade. Our evidence suggests that rating downgrades affect managerial discipline as evidenced by more efficient capital allocation. We find only limited support for the argument that credit rating downgrades exacerbate financial distress.