Abstract
Moody’s adjusts a firm’s reported leverage across several dimensions to determine credit ratings. I find that changes to these adjustments affect capital structure and investment decisions, especially for firms near the investment grade boundary and with bond covenants containing ratings triggers. Further, in 2006, Moody’s made several changes to its adjustment methodologies. I find that changes to adjustments made in 2006 affect capital structure and investment decisions in 2007. Firms most affected by these methodology changes in 2006 also alter their financing and investment behavior as predicted. These results show that rating agencies have the power to affect firm financial and investment policy.
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