The Influence of a Credit Rating Change on Dividend and Investment Policy Interactions

We examine the firm's alterations in dividend and investment activities following credit rating changes. We find that downgraded firms reduce both dividends and investments more than no-rating-change firms. However, a silver lining of this doubly negative impact for shareholders is an increase in investment efficiency in firms that are most likely to overinvest. For upgraded firms, investments increase, but dividend outlays do not, compared to firms without rating changes. Our findings of asymmetric dividend stickiness and symmetric investment changes upon a credit shock suggest that dividends and investments should not always be considered competing uses of funds