The Risk of Angels Falling

Sammanfattning

Seminar date: 2026-06-02 Course: BUSN79 - Degree Project in Accounting and Finance Authors: Filippa Johnson & André Malmberg Advisor / Examiner: Reda Moursli / Elias Bengtsson Five keywords: Dividend Smoothing, Credit Rating, Fallen Angel, Investment-Grade, Speculative-Grade. Purpose: The purpose of this paper is to investigate the relationship between dividend smoothing and credit ratings, more specifically to what extent the risk of being downgraded to speculative-grade affects dividend smoothing. Methodology: Using a fixed effects panel regression, this study examines the impact of the distance of speculative grade on dividend smoothing. We measure smoothing behaviour by lagged dividends per share as well as an interaction with distance to speculative-grade. Theoretical perspectives: The theoretical foundation is grounded in dividend signaling theory, the pecking order theory, agency theory, and the credit rating-capital hypothesis. Furthermore, the study relies on theoretical concepts concerning the cliff effect and the regulatory value of credit ratings regarding the investment-grade boundary. Empirical foundation: The empirical foundation consists of a comprehensive, cross-country panel dataset containing 1 359 public non-financial non-utility firms, holding an active S&P credit rating. The final unbalanced panel contains 10 315 firm-year observations spanning a ten-year period from 2015 to 2024. Conclusions: The study finds strong evidence for traditional dividend smoothing in the sample. However, this behaviour is significantly reduced as firms approach the speculative-grade boundary, indicating that managers prioritize credit rating preservations over payout stability to avoid the severe costs of becoming a fallen angel.