The purpose of this study is to test how credit risk rating affect the cost of debt, and whether credit risk rating have incremental information contents for the future default by public companies from 1998 to 2008. Empirical results show credit risk rating is significantly positive correlated with the cost of debt. The result indicates that when credit rating agencies rate a poor grade on a company, the creditors require a high risk premium, leading to the company with higher cost of debt. Moreover, credit risk rating is significantly positive correlated with the future default. The result indicates that when credit rating agencies rate a poor grade on a company, the higher the probability of future default by the company.
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