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Credit rating actions could discipline management to improve asset allocations, but may also trigger corporate responses to alleviate financial constraints. We investigate which effect (if any) dominates, using corporate asset sales as a laboratory. Our empirical tests are guided by a novel model that can generate both effects and yields several predictions to distinguish the two channels. We find empirically that firms conduct more asset sales following downgrades. Our model and a novel placebo test mitigate omitted variables concerns regarding this result. Further tests provide evidence that strongly points towards a financial constraints effect and hardly to a discipline effect.


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