Cushioning the Blow: How Firms Target Credit Ratings

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ID: 320443
2026
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Abstract
Abstract While firms manage their capital structure to target credit ratings, how targeting impacts capital structure decisions is not well understood. We hypothesize that firms engage in ratings cushioning by preserving a leverage buffer against rating downgrades. We show that ratings cushions are sizable in magnitude. Following plausibly exogenous increases in cushion, firms increase leverage to consume their newfound cushion particularly when they have attractive investment opportunities and are less exposed to earnings shocks. These findings suggest that ratings cushioning restrains firms from pursuing otherwise more aggressive capital structure and investment choices. (JEL G31, G32)
Reference Key
openalex_W7167890385 Use this key to autocite in the manuscript while using SciMatic Manuscript Manager or Thesis Manager
Authors Tim Liu, Anil Shivdasani
Journal The Review of Corporate Finance Studies
Year 2026
DOI
10.1093/rcfs/cfag022
URL
https://doi.org/10.1093/rcfs/cfag022
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