Peer firms’ credit rating changes and corporate financing

We find that firms reduce net debt issuance (NDI, hereafter) when industry peers withthe same credit rating were downgraded in the previous year, as opposed to an aver-age NDI increase among all firms. This finding is consistent with the considerations ofcompetition and contagion associated with relative strengths and weaknesses in creditquality. The peer effect on NDI reduction is ubiquitous across both speculative- andinvestment-grade firms, but is particularly strong for small size firms with speculative-grade ratings, and firms operating in concentrated industries, and in times when theeconomy is in expansion or outside financial crises. We also find that firms reduce lever-age when their ratings are lower than the industry average, and that peer firms’ ratingeffects remain strong even when controlling for the lower-than-average effect.