New research reveals that changes in Moody’s treatment of preferred stock in 2013 led to notable shifts in borrowing, investment, and share prices among speculative-grade firms, highlighting the profound influence rating agencies have on corporate behaviour.
Credit rating agencies are often treated as passive referees, assigning letters to reflect how much risk a company presents to lenders. Yet new research from the University of Texas at Austin suggests their influence can run much deeper, shaping the very financial choices firms make.
The study, led by Cesare Fracassi of the McCombs School of Business with Gregory Weitzner of McGill University, found that a change in Moody’s treatment of preferred stock in 2013 altered how heavily some companies borrowed. By reclassifying preferred securities as entirely equity for lower-rated companies, Moody’s made those firms appear less indebted without any change in their underlying operations. The researchers say the result was a meaningful shift in behaviour: affected companies increased borrowing and stepped up investment.
Preferred stock sits in a grey area between debt and equity. It pays a fixed dividend, which makes it resemble debt, but it does not have to be repaid in the way a bond does. Until Moody’s changed its methodology, such instruments were counted half as debt and half as equity. For firms already below investment grade, the new rule meant preferred stock was treated as 100% equity, making balance sheets look stronger overnight.
Fracassi and Weitzner examined 475 speculative-grade companies, 44 of which carried preferred stock. Those firms saw their average leverage fall from 61.9% to 57.1%, a shift the authors say was roughly equivalent to a one-notch improvement in credit standing. Over the remainder of 2013, the affected companies then raised leverage again, expanded assets and equipment by 8%, and saw share prices rise 2.8% relative to other firms.
The findings add to a growing body of evidence that rating agencies do more than measure risk. Earlier research has shown that when Moody’s changed its leverage-adjustment methods in 2006, firms altered their capital structures and investment plans in the following year. Other work has found that credit ratings can improve market liquidity and reduce information gaps for bonds, while also affecting borrowing costs when ratings fall short of market-implied risk.
Taken together, the studies suggest that rating methodologies can influence corporate finance in subtle but powerful ways. That matters because the agencies’ judgments still shape access to debt, the cost of capital and management decisions about expansion. The broader lesson, Fracassi argues, is that investors should look beyond the headline rating and examine the assumptions underneath it.
The research, published in the Review of Corporate Finance Studies, also lands against a long-running debate over the role of credit rating agencies after the financial crisis, when they were heavily criticised for failing to identify risk in some structured products. Moody’s has long said its ratings process is designed to be independent and objective, but the new findings suggest that its methodological choices can nonetheless move markets and corporate behaviour.
- https://phys.org/news/2026-08-credit-corporate-financial-decisions.html – Please view link – unable to able to access data
- https://www.sciencedirect.com/science/article/abs/pii/S0929119918306837 – This study examines how changes in Moody’s credit rating methodologies impact corporate behaviour. It finds that adjustments to leverage calculations significantly affect firms’ capital structures and investment decisions. Specifically, in 2006, Moody’s altered its adjustment methods, leading to notable changes in firms’ financial strategies in 2007, especially for those most affected by these changes. The research underscores the substantial influence rating agencies have on corporate decisions.
- https://www.nber.org/papers/w31064 – This paper investigates the effects of the introduction of credit ratings on securities markets. It finds that lower-than-market-implied ratings lead to higher secondary market bond yields. Additionally, bonds that were rated experienced a significant decline in bid-ask spreads, indicating reduced information asymmetries and improved liquidity. The study highlights the value of ratings in enhancing information transmission within financial markets.
- https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2054816 – This research explores how Moody’s adjustments to a firm’s reported leverage influence corporate behaviour. It reveals that changes in Moody’s adjustment methodologies affect firms’ capital structures and investment decisions. In 2006, Moody’s made several changes to its adjustment methodologies, which significantly affected firms’ adjustments in that year. These changes influenced capital structure and investment decisions in 2007, particularly for firms most exposed to these methodology changes.
- https://journals.sagepub.com/doi/full/10.1177/1471082X211057610 – This article proposes a dynamic model to describe the relationship among firm defaults and credit ratings from various raters. The model incorporates firm-specific effects, a latent systematic factor representing the business cycle, and idiosyncratic observed and unobserved factors. Bayesian estimation techniques are employed to estimate the parameters of interest. The framework is applied to a sample of publicly traded US corporates rated by at least one of the credit rating agencies S&P, Moody’s, and Fitch during the period 1995–2014.
- https://www.sec.gov/news/extra/credrate/moodys.htm – This statement from Moody’s Investors Service addresses potential concerns regarding the role of credit rating agencies, particularly focusing on conflicts of interest and abusive practices. It acknowledges the issuer-fee-based structure of the ratings business and emphasizes the importance of managing conflicts effectively. The statement outlines fundamental principles of Moody’s ratings, including the independence of rating decisions and the objectivity of rating actions, and discusses the company’s efforts to ensure the integrity of the rating process.
- https://www.mdpi.com/2071-1050/14/13/8008 – This study examines the effects of access to public debt on corporate financing decisions in real estate investment trusts (REITs). It finds that the introduction of credit ratings by S&P and Moody’s has enabled REITs to access the public debt market. The research highlights the significant role that credit ratings play in facilitating corporate financing decisions, particularly in the context of REITs, by providing a mechanism for accessing public debt markets.
Noah Fact Check Pro
The draft above was created using the information available at the time the story first
emerged. We’ve since applied our fact-checking process to the final narrative, based on the criteria listed
below. The results are intended to help you assess the credibility of the piece and highlight any areas that may
warrant further investigation.
Freshness check
Score:
8
Notes:
The article references a study by Fracassi and Weitzner, published in May 2026, which is recent. However, the study itself is forthcoming in the Review of Corporate Finance Studies, indicating it has not yet been peer-reviewed and published. This raises concerns about the reliability of the findings presented in the article. Additionally, the article was published on Phys.org on August 13, 2026, which is over two months after the study’s release, suggesting a delay in dissemination.
Quotes check
Score:
7
Notes:
The article includes direct quotes from the study, such as: ‘The rule change transferred value from debt to equity holders and led to an increase in preferred stock issuance.’ However, these quotes cannot be independently verified as the study is not yet publicly available. This lack of verifiability raises concerns about the accuracy and authenticity of the quotes.
Source reliability
Score:
6
Notes:
Phys.org is a science and technology news website that often publishes articles based on press releases and academic studies. While it provides summaries of scientific research, it is not a peer-reviewed journal. The reliance on Phys.org as the primary source for this information diminishes the reliability of the content. Furthermore, the study itself is forthcoming in a peer-reviewed journal, which means its findings have not yet undergone the scrutiny of the academic community.
Plausibility check
Score:
7
Notes:
The claim that Moody’s reclassification of preferred stock in 2013 led to increased borrowing and investment by affected companies is plausible. Previous research has shown that changes in rating agency methodologies can influence corporate financial decisions. However, without access to the full study, it is difficult to assess the validity of the methodology and the robustness of the findings. The article also lacks specific examples or data to support the claims, which diminishes its credibility.
Overall assessment
Verdict (FAIL, OPEN, PASS): REVIEW
Confidence (LOW, MEDIUM, HIGH): MEDIUM
Summary:
The article presents claims based on a forthcoming study that has not yet been peer-reviewed and published, raising concerns about the reliability and accuracy of the information. The reliance on Phys.org as the primary source further diminishes the credibility of the content. Without access to the full study or independent verification, it is difficult to assess the validity of the claims made. Therefore, a thorough review and independent verification are recommended before publishing.