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A Tale of Two Tails: Cross Credit Ratings and Cash Holdings

This paper examines the role of cross credit rating changes on corporate cash holdings policies, focusing on the "big three" credit rating agencies (Standard and Poor's, Fitch and Moody's). Using a hand collected sample of credit ratings for firms listed at the S&P500 we initially verify the asymmetric impact of Standard and Poor's changes on cash holdings and we extend our findings to Fitch and Moody's separately. However, we show that the information content of the various credit rating agencies is crucial and affects managers' risk aversion behavior and precautionary motives. Therefore, a cross credit rating downgrade by agencies that provide different information to the market (Moody's with any, or both, of the other two agencies) lead to a consistent and significant increase in cash holdings. These results remain valid for firms with investment grade status and high level of financial pressure, or if we use excess cash holdings.