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Credit Ratings and Capital Structure

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Author Info
DARREN J. KISGEN
Abstract

This paper examines to what extent credit ratings directly affect capital structure decisions. The paper outlines discrete costs (benefits) associated with firm credit rating level differences and tests whether concerns for these costs (benefits) directly affect debt and equity financing decisions. Firms near a credit rating upgrade or downgrade issue less debt relative to equity than firms not near a change in rating. This behavior is consistent with discrete costs (benefits) of rating changes but is not explained by traditional capital structure theories. The results persist within previous empirical tests of the pecking order and tradeoff capital structure theories. Copyright 2006 by The American Finance Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2006.00866.x
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Publisher Info
Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 61 (2006)
Issue (Month): 3 (06)
Pages: 1035-1072
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Handle: RePEc:bla:jfinan:v:61:y:2006:i:3:p:1035-1072

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  1. Jean-Marc Bourgeon & Georges Dionne, 2007. "On Debt Service and Renegotiation when Debt-holders Are More Strategic," Cahiers de recherche 0729, CIRPEE. [Downloadable!]
  2. Elsas, Ralf & Florysiak, David, 2008. "Empirical Capital Structure Research: New Ideas, Recent Evidence, and Methodological Issues," Discussion Papers in Business Administration 4743, University of Munich, Munich School of Management. [Downloadable!]
  3. Fulop, Andras, 2006. "Feedback Effects of Rating Downgrades," ESSEC Working Papers DR 06016, ESSEC Research Center, ESSEC Business School. [Downloadable!]
  4. Dion Bongaerts & K.J. Martijn Cremers & William N. Goetzmann, 2009. "Multiple Ratings and Credit Spreads," NBER Working Papers 15331, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. David Amdur, 2008. "Capital Structure Over The Business Cycle," Working Papers gueconwpa~08-08-03, Georgetown University, Department of Economics. [Downloadable!]
  6. Mierzejewski, Fernando, 2008. "The optimal liquidity principle with restricted borrowing," MPRA Paper 12549, University Library of Munich, Germany. [Downloadable!]
  7. Gunter Löffler & Alina Maurer, 2009. "Incorporating the Dynamics of Leverage into Default Prediction," SFB 649 Discussion Papers SFB649DP2009-024, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
  8. Tara Rice & Philip E. Strahan, 2008. "Does credit supply affect small-firm finance?," Finance and Economics Discussion Series 2008-54, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  9. Giannetti, Mariassunta & Yafeh, Yishay, 2008. "Do Cultural Differences Between Contracting Parties Matter? Evidence from Syndicated Bank Loans," CEPR Discussion Papers 7020, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  10. Darren J. Kisgen & Philip E. Strahan, 2009. "Do Regulations Based on Credit Ratings Affect a Firm's Cost of Capital?," NBER Working Papers 14890, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Allen Berger & Robert DeYoung & Mark Flannery & David Lee & Özde Öztekin, 2008. "How Do Large Banking Organizations Manage Their Capital Ratios?," Journal of Financial Services Research, Springer, vol. 34(2), pages 123-149, December. [Downloadable!] (restricted)
  12. Allen Berger & Robert DeYoung & Mark Flannery & David Lee & Ozde Oztekin, 2008. "How do large banking organizations manage their capital ratio?," Research Working Paper RWP 08-01, Federal Reserve Bank of Kansas City. [Downloadable!]
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