Utilizing the 2005 Lehman index rule change, we examine the role of multiple bond ratings in corporate hedging. We find an asymmetric pattern for firms near a rating downgrade and those near an upgrade. Specifically, firms near a downgrade right before the Lehman event display a strong demand for a third Fitch rating shortly after it, whereas those near an upgrade do not. More than 75% of the firms that would have been effectively downgraded ex post rightfully acquired a third Fitch rating ex ante. This decision prevents 67% of these firms from being downgraded from their original broad rating categories. Furthermore, having a third rating is attractive to investors only for bonds near a downgrade. Investors increase the holdings of these bonds and trade them more actively after the Lehman event. These results suggest that firms use multiple ratings to hedge against downgrade risk.

This paper draws parallels between the principal components analysis of factorless high‐dimensional nonstationary data and the classical spurious regression. We show that a few of the principal components of such data absorb nearly all the data variation. The corresponding scree plot suggests that the data contain a few factors, which is corroborated by the standard panel information criteria. Furthermore, the Dickey–Fuller tests of the unit root hypothesis applied to the estimated “idiosyncratic terms” often reject, creating an impression that a few factors are responsible for most of the nonstationarity in the data. We warn empirical researchers of these peculiar effects and suggest to always compare the analysis in levels with that in differences.