Corporate financial policies in misvalued credit markets
By: Jarrad Harford, Marc Martos-Vila, Matthew Rhodes-Kropf
Contributors: Rhodes-Kropf, Matthew, author; Martos-Vila, Marc, author; Harvard Business School
Series: Working paper / Harvard Business School -- 14-097; Working paper (Harvard Business School) -- 14-097.
Publisher: Harvard Business School
Published: 2014
Place of publication: Boston]
Language: eng
Number of pages: 59
Description: We theoretically and empirically investigate the repercussions of credit market misvaluation for a firm's borrowing and investment decisions. Using an ex-post measure of the accuracy of credit ratings to capture debt market misvaluation, we find evidence that firms take advantage of inaccuracies by issuing more debt and increasing leverage. The result goes beyond a wealth transfer and has real investment implications: approximately 75% of the debt issuance funds increased capital expenditures and cash acquisitions. In the cross section, misvaluation affects financially constrained firms the most, supporting the theoretical prediction that debt overvaluation loosens financial constraints.
Notes: "April 2014" -- Publisher's website.

Includes bibliographical references (pages 29-34).